The Condo Conundrum
A sweeping change in the FHA condominium approval process will drastically affect the availability of financing for condominium projects. On November 2nd of this year, FHA will remove all condominium projects from its approved list that have not been approved within the last two years. To be eligible for FHA financing, condo projects will have to go through a re-approval process. Spot loan approvals will no longer be possible as the entire project must now be approved. The immediate effect of this is that there will be very few condos available for FHA financing until the projects begin to find their way back onto the approved list. Many formerly approved projects, however, may not qualify for re-approval. This will not only impact the availability of FHA financing but VA as well. Although VA maintains its own list of approved condos, it also accepts any project listed on the FHA approved list. The FHA list has always been more extensive than VA’s.
There will be two ways that a Condominium project can be added back to the approved list. Lenders can approve projects through their DE underwriters or the projects can apply directly with FHA for approval. I have yet to speak with a lender who has said they will be re-approving projects. This means, most likely, that the projects and their HOA’s will have to work directly with FHA. The question is, “How many will do so?”.
The Conventional loan market for condos is also getting very restrictive. Several of the major Private Mortgage Insurance companies have pulled out of the condo market altogether. Typically these companies would insure the lender against loss for loans in excess of 80% loan to value making it possible for buyers to buy with less down payment. Even though there are a couple of companies still willing to insure high balance condo loans, their underwriting requirements are severe……a minimum Fico score of 760 and maximum debt ratio of 41%. The project has to be stellar in all aspects as well (owner occupancy, cash reserves, no special assessments or litigation, etc.).
So therein lays the conundrum. How do you buy a condominium in today’s market? The options are narrowing. You can still purchase properties on the current FHA approved list until November 2nd, but the escrow must close by November 30th. Spot approvals are also available but must be expedited to close by the deadline. If you intend to purchase a condo with conventional financing, be prepared for at least a 20% down payment. As for FHA, I have heard rumors that they may postpone the November 2nd deadline once again, but, if not, we will just have to wait and see how long it takes for the condo projects to find their way back to the approved list.
Please pass this article about The Condo Conundrum on to others. 
UPDATE: Please read my updated comment below. I received a very good question from one of our readers.
UPDATE: FHA has extended this to December 7th, 2009. Once we get a little closer we may see another extension or possibly a change in policy.
Rick Harrell
Tri Star Mortgage, Inc.
Phone: (619) 200-9775
1081 Camino del Rio So. #128
San Diego, CA 92108
Rick@TriStarMortgageInc.com
www.TriStarMortgageInc.com
October 14th, 2009 at 1:24 pm
This is an issue that one of my friends is dealing with. He is approved to buy a condo and can’t find anything in his price range that is FHA approved and it only seems like it is going to get worse!
October 15th, 2009 at 12:36 am
11/30/09 also happens to be the deadline for closing on a house and being eligible for the first time homebuyers tax credit as well.
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October 15th, 2009 at 2:33 pm
Better that you walked away so those deficiences don’t become your responsibility. My condo building has had two special assessments in the 6 years I’ve lived there, each for several thousand dollars, to fix “deficiences”. Ugh. Plus it is a buyer’s market, so good luck!
October 15th, 2009 at 3:44 pm
That is bad news, nothing unexpected from this whole Real Estate crisis though. Like all the products on the market, we must wait for a good opportunity before deciding on a condo.
October 15th, 2009 at 5:41 pm
I received this email with a couple questions last night. “Can you please explain to me what this means? I am only qualified for an FHA loan….does this mean there will not be any more potential condos to buy with an FHA loan? Just how will it affect me, in concrete laymen terms today and the future?”
Well, it’s a bit of a long response so here goes. Hope it helps others,
The new FHA guidelines regarding re-certification of existing condo projects is, in my opinion, meant to insure that the projects continue to meet FHA’s minimum requirements and to manage its risk under the FHA Mortgage Insurance Program. This program protects lenders from loss if a borrower defaults on a loan. FHA has specific requirements to assure that the project they are insuring is sound and well managed. If it is not, the borrower could be adversely affected and any subsequent hardship could present a problem, ultimately, to FHA.
A majority of existing approved projects have been on FHA’s list for years, some even for decades. During that time, especially during the last couple of years, the economic downturn coupled with a high volume of foreclosures nationwide has put many projects into troubled waters. Home owner’s associations are experiencing budget and cash reserve problems due to foreclosed units in their projects and high delinquencies on monthly association fees. Some have had to levy special assessments to maintain operating expenses and others have become involved in litigations. Low owner occupancy ratios within projects is also a concern.
As for what all this means to you and other borrowers seeking FHA financing on a condominiums after November 2nd, your options will be greatly reduced. Until, at least, lenders step up and begin to take it upon themselves to re-certify existing projects using the new Lender Review and Approval Process outlined by FHA. Failing this, Condo HOA’s must realize the importance of having their projects on FHA’s approved list and work directly, if necessary, with FHA to have their projects re-approved.
Ultimately, properties will begin to repopulate the FHA approved list, but how long it will take is uncertain at best. I would recommend to you, as an immediate course of action, to try and find a property to your liking and get it into escrow before the November 2nd deadline. Also, try to avoid “short sales” and stay with regular listings or REO properties due to the time constraints before the new changes take effect.
October 17th, 2009 at 2:00 am
It is going to be near impossible to buy a condo unless you pay cash. This certainly isn’t going to help the real estate market recover either.
Charles@Las Vegas Condos´s last blog ..Time Running Out for the First Time Home Buyer Tax Credit
October 19th, 2009 at 8:14 pm
You’re definitely right about that Charles. Everyone’s trying to make it out to look like were out of the woods. It’s not so.
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October 21st, 2009 at 8:17 pm
Yeah it is very hard even in Texas where alot of Condos fit in the FHA limits. Condos are a hard sale right now
October 30th, 2009 at 3:20 am
As suggested by Rick, getting into an escrow is the only good thing can be done and Nov 2 has only 4 days left
November 27th, 2009 at 12:23 am
The world of mortgages and financing is so foreign to me, I am just barely attempting to purchase my first home, and it is taking a long time to figure out all of this stuff. Thanks for the articles.looking forward for more updates.
February 16th, 2010 at 3:14 am
Nice rundown you have given, worth while the read especially for future buyers
March 9th, 2010 at 10:16 am
As a foreigner I’m finding it so hard to understand your mortgage and buying process over here, it doesn’t seem to be favourable to either buyer or seller. Surely theres a simpler way or perhaps I’m just dimmer than I look!