FHA Revises Condo Rules

Agency reduces barriers to financing, though restrictions still hamper some investments.

November 1, 2012

When an investor seeking FHA financing last August tried to buy a condominium unit in Telluride, Colo., the picturesque ski town nestled in the Rockies, the transaction fell through. Too much space in the project was devoted to non-residential commercial use.

“The project didn’t meet the condo-to-commercial ratio, so I lost the deal,” says George Harvey Jr., broker-owner of the Harvey Team in Telluride and vice chair of NAR’s Resort Committee. “The FHA has all these check boxes—you can’t do this, you can’t do that—and even for loans that aren’t FHA-insured, a lot of banks won’t make a loan on the idea that, if the FHA isn’t going to make it, they’re not going to either. So, anything the FHA can do to make condo financing a little easier would be really important.”

Harvey got his wish on Sept. 13, when the agency issued guidelines that ease its rules for condo financing, including changing the condo-to-commercial ratio that derailed Harvey’s transaction.

Under the new policies, the FHA can approve loan applications for condos in projects that have as much as half of their space devoted to commercial use, up from 25 percent before the change. That’s an especially important shift for mixed-use projects, which devote ground-floor space to stores and restaurants and upper floors to residences. “The FHA’s changes are a very helpful move in the right direction,” says John Anderson of Twin Oaks Realty in Minneapolis, a 32-year veteran practitioner in the Twin Cities area who makes about a quarter of his yearly sales in condo projects.

The FHA announced four main financing changes. In addition to the liberalized condo-to-commercial ratio, the agency is allowing single investors to buy up to half the units in a project, up from 10 percent previously. That move is as likely to help suburban and urban markets as resort areas. “I just had a closing fall through because the lender found out the investor had 11 percent of the units,” Anderson says.

The other two changes touch on delinquent home owner association dues and condo board certification. The FHA says it will OK loans on projects in which 15 percent of the home owners are 60 days late on their HOA dues. That represents an easing from the previous 30-day delinquency limit.

The certification change concerns the liability risk of condo board representatives. Previously, officers had to confirm that they had “no knowledge of circumstances or conditions” that could adversely affect the building. But many representatives are volunteers who have been reluctant to take on that legal responsibility. The language has been softened and now recognizes boards’ good-faith efforts to verify condo information.

Anderson has confronted that issue with a group of condo board members. “They said, ‘We can’t make that statement. We’re not going to commit to that.’ It’s not that there was anything wrong with the board. It’s just that they felt, ‘Well, what if we miss something?’ ”

More Easing Ahead

The FHA may offer additional changes pertaining to policies that limit buyers’ access to FHA condo financing. A major impediment now in place is the requirement that at least half the units be owner-occupied. That’s a particularly tough restriction in resort areas where many units are attractive investments as short-term vacation rentals. Any changes would require a new FHA rule, which could happen early next year, NAR analysts say.

Another area appropriate for future rule making relates to the 50 percent FHA financing limit. Currently, the FHA won’t approve a loan if half of the units in a project already have FHA financing. “Spot approval” changes are also on the radar, practitioners say.

The FHA used to allow “spot approvals” of FHA financing for units in newly constructed projects that weren’t yet FHA-certified. Those approvals stopped during the mortgage crisis, and practitioners would like to see their return. “In our area, condo financing rules are the No. 1 complaint for getting properties sold,” says Harvey. “So, this is really welcome, but more needs to be done.”

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.