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.