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The clock has been ticking for condo buyers who plan to use an FHA loan to fund their condo purchases.  Effective December 7, all condominium complexes will lose FHA approval.  New applications for FHA approval must be submitted.  Until new approvals are granted by the Federal Housing Administration, no new FHA loans will be available for condo purchases.

New FHA guidelines are source of confusion to San Diego condo buyers
New FHA guidelines are source of confusion to San Diego condo buyers

In order for a condominium complex to obtain FHA approval, the complex must provide evidence that it complies with the current FHA guidelines.  In June 2009 FHA issued new guidelines that were to take effect October 1, 2009.  The new guidelines would have made thousands of previously FHA-approved condo complexes ineligible for FHA financing.  The already tight lending market was to become even tighter for borrowers purchasing condominiums with FHA insured loans.

Concern that the new stringent rules and would further cripple the fragile real estate market led Congress to push back the effective date of the new guidelines until November 2.  Under urging by the National Association of Realtors, the date was extended until December 7, 2009.  Now, after further consideration, FHA has again modified its new guidelines for FHA approved condominium complexes.

Yesterday, at the NAR’s annual convention in San Diego, FHA Housing Commissioner Dave Stevens  summarized the new FHA guidelines, which are intended to provide more lenience to address difficult market conditions.   To summarize:

  • The spot approval process has now been extended until February 1, 2010.
  • 50% of the units in a condo project must be owner occupied but FHA now allows excluding vacant and bank-owned real estate units in the calculation of owner-occupancy ratios.
  • The number of units in a condo project that can be financed with FHA loans has been increased from 30% to 50%.
  • Condo complexes with 15% of owners that are past due on association fees will not be allowed FHA approval.

What does this mean?  If you are a first time buyer and are considering purchasing a condominium, you have been given at least two more months to make a purchase.  This is good news for prospective buyers of San Diego condos who want to take advantage of the first-time home buyer tax credit before April 2010.  Although all condominium complexes will lose their FHA approval on December 7, extension of the “spot approval” process will still allow lenders to fund FHA loans on condo purchases through February 1, 2010.

After February 1, each individual condominium homeowner’s association (or a mortgage lender seeking to lend money on a condo purchases), will need to re-apply for FHA approval.  This will take time.  However, the new guidelines will eventually lead to FHA approval for thousands of condo complexes that would not have passed muster under the more restrictive guidelines.  Specifically, eliminating vacant and bank-owned properties from the owner-occupancy ratios is a major victory for condo complexes that have suffered high rates of foreclosure.

For prospective home buyers who do not have a 20% down payment, FHA insured loans have become the only viable option, allowing purchases with as little as 3.5% down.  Three years ago FHA loans were practically unheard of in San Diego.  Today FHA loans account for more than half of all mortgages on San Diego homes.  The low down payment requirement makes these loans particularly attractive to first-time home buyers, but FHA loans are available to finance any residential home mortgages up to $697,250.  Along with the home buyer tax credit and low interest rates, you couldn’t ask for a better opportunity.

27 Responses

    1. That’s really pretty ridiculous. Many condo buyers are first time buyers, and don’t have a large down payment. These first time buyers need the FHA loan to have a chance. If this stays in effect it is going to make a lot of condos lose their values as they will be much harder to sell.

  1. It’s easy to understand how the changing FHA regulations and deadlines could confuse potential buyers. I found the point about how more than half of mortgages on San Diego homes are FHA-funded to be very intriguing. How have FHA loans fared in 2009 alone?

    And that increase from 30 percent to 50 percent of a condo project being able to be FHA-backed is also exciting.

  2. I agree with Alan on this one, the new guidelines on condos are really going to come down hard for first time home buyers and consequentially, anyone in a condo looking to sell!

    Thanks for the update on the guidelines, I’ll be sure to pass this information along.

  3. This sudden change in rule will create a lot of harassment to the condo buyers, specially the new buyers. If this continues to go on, then the condo price will just fall down, as there will be a fall in number of buyers.

  4. I think real estate is the greatest work i have ever seen in my life because it is a best field to make a good money. I think there are no risk in the real estate investment so that it can be a better option to do with your daily earning. Anyways keep it up and keep continue with your valuable thoughts.

  5. Interesting site, especially with the economy still the way that it is. I would be interested in seeing more information as 2010 goes along to see if your opinion changes.

    1. Yes Terry, the Federal Housing Administration’s FHA Loan Program is nation-wide. But the FHA does have different loan limits for each county in the country, which are based upon the median home values in the local area.

  6. Nice article, Update is that FHA has placed in effect the new standards. Article is correct about the difficulty in obtaining FHA as well as FNMA and FHLMC financing of condos. HUD needs to recognise the need for first time home buyers and high LTV financing. Unfortunately, they will not make any changes until it is too late as prices start to rise, rates go up and inflation arrives. NICE Article.

    1. Thanks for your feedback. Yes, the FHA can make financing difficult, but they have helped the market through a difficult time. Now the private lenders are loosening credit scores again. We’re seeing some big players get back into the jumbo loan market with very attractive rates and lower down payments. San Diego luxury homes are going to start moving again, and we may be seeing the tail end of the opportunity to grab great properties for below-market prices. The entry level is already booming with more overbids than underbids. In fact, that will be the topic of my next blog post. Stay tuned!

  7. The government is bending over backwards to repair the economy and it’s a good thing. On one hand, FHA needs to make the rules more strict to get loans in order to avoid more foreclosures, but if it does so, then it becomes harder to purchase a property in an time when the real estate market is face down. I don’t envy their tough choices, but I’m glad they are trying to make sense of the situation and make changes as they become necessary.

  8. The new rules can be really confusing not just to new buyers but to old buyers who want to buy again. When the economy is down, people should be able to get loans.

  9. I agree with Susan. Stricter rules may mean less foreclosures, but these rules do not make it easy for those who are able to purchase. However, it’s good that something is being done. I’m convinced these rules will be altered once the economic situation improves — or worsens (which, of course, I hope it won’t).

  10. The problem here is that loans were just too easy to get a few years ago and now people are struggling to make monthly payments and losing their homes but for those who can afford to pay, the banks just arent lending at the moment, such a mess.

  11. This is probably a way devised to prevent a ‘bubble explosion’ in the condo market. A similar tactic is panned out by Thai government (where I am based), but there are so many more red tapes and grey areas to traverse when it comes to loans, especially for foreign ownerships. Consider yourself lucky that the FHA changes are all pretty clear cut.

    1. Rather than attempt to avoid a bubble in the condo market, I think the FHA rules were designed to prevent Fannie Mae and Freddie Mac from investing in overpriced properties. Condos have traditionally been more risky than single-family houses. That’s why they make it a lot easier for people to buy houses in San Diego.

  12. The more difficult it is to get financing, the lower the home sale prices will be. Good thing lots of people want to live in condos for the ease of maintenance.

  13. Nice post! and i am also agree with Susan. Stricter rules may mean less foreclosures, but that rules do not make it easy for those who are able to purchase. i am also convinced these rules will be altered once the economic situation improves, thanks foe sharing…

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