Fast Fact: When the bubble burst, FHA dramatically cut condo loans. But condos play an essential role for first-time buyers, creating a ripple effect for move-up buyers, home values, and local economies.
Since the real estate bubble burst, more and more first-time and low- to moderate-income home buyers are using Federal Housing Administration loans, a trend expected to continue for years to come.
In 2010, the FHA significantly tightened requirements for condominium loans in order to protect itself from bad loans in the wake of the financial crisis.
New rules made selling condos harder, reducing the buying pool to only 40% of potential home buyers. Rules required that FHA not only approve the buyer, but it had to approve the the condominium building itself.
Deal killers could include too many renters in a building or low association reserves. Many of these buildings became known as “blackballed” or “zombie” buildings.
Why does it matter? Because condos tend to be lower priced than single family homes, making them the ideal, and sometimes only, option for first-time and lower- to middle-income buyers. The fact that inventory for these buyers has been so low for so long certainly didn’t help matters.
As a result, these stricter requirements dashed the dreams of millions of potential home buyers, who abandoned their homeownership quests and instead remained renters. It’s one of the reasons why, nationally, American homeownership is at a 30-year low!
“It’s difficult to sell an existing unit if you can’t find a qualified buyer…A lot of people are frozen in place: Those in (a condo unit) can’t get out; those out can’t get in.” – Frank Kowalski, president of Florida Realtors in 2005
And the sellers of these condo units found themselves faced with fewer buyers, meaning fewer offers and lower sale prices. Because these sellers are also typically “move-up” buyers, the impact has a ripple effect for home values and local economies.
The good news is that FHA recently provided new guidance on its rules for certifying condo buildings!
The new rules…
– Loosen the definition of owner-occupied units to include second homes that are not investor owned. FHA will not insure loans in a building where too many of the units are investor owned, rentals, or not occupied by the actual owner full-time. In many areas, that’s a big deal since so many owners live up North during the warm weather, and then flock to second homes in southern climates when the weather gets cold.
The changes mean that more buildings will now qualify for the required FHA ratio of owner-occupied units, vastly increasing both the supply of buildings and units available, and the pool of buyers that can now qualify for a loan.
– Simplify the “recertification” process that condos must go through every two years in order to become and remain on the FHA approved list.
This should translate to more buildings on the market.
– Loosen up the type of insurance FHA requires.
This is especially important in coastal areas, where affordable insurance is hard to come by. In Florida, for example, FHA will now accept “Citizens Property Insurance” coverage, the insurance company owned by the state and largest condo insurer in Florida. In addition, FHA changed the way it will view “co-insurance” clauses, contained in most Florida condo policies. That’s expected to make up to 85% of Florida’s condominiums that didn’t quality previously, now available to FHA buyers.
What Does the FHA Require For a Condo to Be Approved?
- Right of first refusal” in condo rules cannot violate discriminatory rules under the Fair Housing Act (Regulation 24 CFR part 100, to be specific).
- No more than 50% of the property can be used as commercial space.
- No more than 15% of units can be arrears more than 60 days.
- No more than 50% of the units can be rentals.
- No more than 50% concentration of FHA loans.
- At least 10% of the building’s budgeted income must go toward a reserve account.
- Specific insurance requirements must be met.
The new rules expire in a year so, but it’s hoped the FHA will implement more comprehensive condo changes before then. In the meantime, you can email your questions to firstname.lastname@example.org.