Condos becoming FHA no-lending zones

For young, first-time buyers, people with modest down-payment cash, or seniors who want to tap their equity using a reverse mortgage, it’s a growing problem: They cannot use Federal Housing Administration financing in condominiums.
It’s not that these buyers and unit owners can’t qualify on credit and income grounds for a loan personally – they often can. Instead, it’s because the entire condominium development is ineligible. As the result of policy changes at the federal level and decisions by condominium boards of directors, thousands of communities have essentially become prohibited lending zones for FHA in the past several years.
The agency has banned so-called “spot” loans and will only insure mortgages on units in condo projects that have passed a certification process that examines budgets, reserves, insurance coverage, percentage of renters compared with owners in the development and delinquencies on payment of condo fees.
FHA says that its revised procedures weed out fiscally weak, poorly managed developments and reduce taxpayer exposure to future losses. Condominium boards, on the other hand, argue that some of FHA’s evaluation criteria are too strict and that the certification process is bureaucratic and costs them money they would prefer not to spend.
Since toughening its financing rules and requiring certification of entire projects four years ago, the number of condo developments approved for FHA financing has plunged by more than half. As of midmonth, it stood at just 10,020 communities, according to an FHA spokesman. Industry sources estimate the total number of condo projects nationwide is around 144,000.
FHA financing is important because of the special niches it fills. Among the three major federal lending intermediaries – Fannie Mae and Freddie Mac are the other two – FHA is the most flexible on credit issues. It is also lenient on debt ratios and allows down payments as small as 3.5 percent. FHA also plays an outsized role in the reverse-mortgage market for seniors 62 and older. Its insured reverse mortgage product accounts for more than 90 percent of all borrowing in that field, allowing seniors to extract needed cash from their home equity to support their retirement expenses.
But with the sharp decline in FHA-approved condominium projects, many buyers and unit owners are finding themselves financially frozen out. Equally troubling, unit owners who want to sell find the pool of potential buyers reduced – along with the market value of their property – because FHA mortgages are banned.
Seth Task of Berkshire Hathaway HomeServices Professional Realty in Solon, Ohio, says a condo-unit client his firm represented recently was forced to sell for $10,000 below what she had been offered by a buyer who was prequalified for an FHA loan – a loss solely attributable to the condominium’s noncertified status.
Situations like this are becoming more frequent, housing-industry experts say, and the lack of FHA financing eligibility for entry-level-priced condo units is partially responsible for the decline in first-time-buyer participation in the real estate market.
But now a movement is getting underway to reverse this shrinkage. At last month’s spring legislative conference of the National Association of Realtors here in Washington, California brokers and agents unveiled a campaign to convince condo boards to rethink their objections to FHA certification – for their unit owners’ sakes.
For most condo developments, the message is this: Give some thought to the issue. FHA certification has its complications and costs, but it could be more than worth the effort for your current residents and future buyers. •


Ken Harney is a member of The Washington Post Writers Group. He can be reached at kenharney@earthlink.net.

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