New Federal Law Eases FHA Restrictions on Condominium Mortgage Loans
Congress has just enacted new legislation on housing that should have a positive effect on condominium mortgage loans. The new law requires the US Department of Housing and Urban Development (HUD) to loosen the burdensome restrictions that, in recent years, have made it more difficult for condominiums to qualify for FHA-backed mortgage loans. This is important to condominium complexes because FHA-backed mortgages widen the pool of potential purchasers by allowing lower down payments and more liberal credit requirements, such as lower credit scores and higher debt-to-income ratios. Under the Obama administration, the FHA adopted very restrictive qualifications that condominiums had to meet in order to qualify for FHA loans. As a result, the number of condos purchased by buyers using FHA loans dropped from an average of about 90,000 units per year to less than 25,000 last year. Many purchasers, especially during and after the recent recession, were unable to meet the more stringent requirements of private mortgage loans, often making FHA loans their only option. However, if a buyer wished to purchase a condominium unit, but the condominium complex didn’t meet the strict FHA guidelines, the buyer would have to look elsewhere. The new law is short on specifics, but it shows the clear intent of Congress to address the following issues:
- HUD is ordered to streamline the condominium project certification process so that it is “substantially less burdensome.”
- Exceptions from the acceptable percentage of commercial space in a residential condo project (currently capped at 25%) can be handled by the local HUD field office, which is allowed to consider the local economy or specifics of the particular project.
- Prior to the new law, condominiums that required a transfer fee to be paid to the association when a unit is sold were disqualified from obtaining FHA approval. HUD has been ordered to lift this prohibition.
- HUD has been ordered to issue guidance on the minimum percentage of units that must be occupied by owners (as opposed to being leased to tenants) and provide justification for its restrictions in this regard. Current regulations require that at least 50 percent of the units be owner-occupied. The new law reduces this number to 35 percent unless HUD can justify a deviation from that cap based on local economic conditions and factors unique to a particular project.
All of this is good news for condominium owners and prospective purchasers. The HUD secretary has been given 90 days to publish new guidelines in line with Congress’s directives. Those who elected not to pursue FHA qualification in the past may find the new regulations a welcome change. Condominium owners, boards of directors, and community managers should keep abreast of the new regulations. The Community Association Institute follows and reports on federal legislation and regulations here: https://www.caionline.org/Advocacy/GovernmentAffairsBlog This column was originally published in the Charlotte Observer on August 6, 2016. © All rights reserved.