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CONDO LOAN GUIDELINES ARE CHANGING - AGAIN

Stop me if you have heard this one before.

FHA financing has become more prevalent in the market over the last two years as Fannie Mae and Freddie Mac tightened the reigns on low down payment condo loans. More and more condo deals (at least the ones I am seeing) are being financed by FHA backed loans - they are still guaranteeing loans for up to 97% of a purchase price.

That may change soon in the wake of FHA's Mortgage Letter 09-19, issued earlier this week. Lending guidelines for condominiums are changing. again.

Basically, FHA requires that both the borrower and the property must satisfy lending guidelines. Condo approvals come in three different flavors:
  1. The Condominium is already on HUD's approved list;
  2. The developer or association apply for an approval of the entire building/project (to get on that list) - a "blanket" approval; or,
  3. The specific unit is approved on an ad hoc basis - a "spot" approval.
Spot approvals require certain specified requirements be met in order to obtain HUD’s blessing (Typically a two page questionnaire). A pain, but faster & easier than submitting the ream of documentations necessary for a blanket approval for an entire condo project.

HUD has announced that, effective October 1st, it is eliminating the spot approval process. Early reports suggest that some lenders stop processing applications for spot approvals even sooner (yikes!).

I strongly encourage anyone who is shopping for a condominium, and intends to use an FHA loan so as to make a minimal down payment, to get going NOW, before this rule changes. Blanket approvals might get somewhat streamlined, but are going to take time. Too much time to make them viable options for any single buyer or resale situation.

There are, at least, two silver linings in all of this

  • elimination FHA's prohibition of the right-of-first-refusals, and
  • and end to the "1-year waiting period" for condo conversion project approvals.

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Comments

Kiwi said…
So does this mean condo associations who have a right of first refusal in their bylaws do not need to get them removed?
June 23, 2009 at 9:44 PM
Michael H. Wasserman said…
my favorite lawyer answer;

THAT DEPENDS!

1/ if the governor signs, and if FHA allows spot approvals on condos with the first right of refusal (FRR) then it would seem unnecessary to go through the hoops to eliminate them.

2/ if the unit owners do not have any urgent need or desire to sell their units in the near term, i'd be inclined to wait until after october 1 to see how mortgage lenders adapt to the new fha guidelines.

after the 1st, lenders with "direct endorsement" (DE) will be able to approve enitire condo buildings, for FHA. if they can do so efficiently (quickly) and without jacking up the costs of mortgage loans on those condos, there won't be any particular need to eliminate the FRR's. as a practical matter, it just wont matter any more.

3/ BUT, smaller condo associations (2-6 units?) might still want to give serious consideration to making the change. my suspicion is that DE approvals will make more business sense to lenders who believe that they will be able to make multiple loans into those buildings. the fewer the number or units, the fewer opportunities they will have to make loans, the less likely they will be to devote resources to approval of those condos.

smaller associations (in my mind, anyway) will probably still want to consider eliminating their frr's...particularly if an owner or two really want or need to sell soon.
June 24, 2009 at 8:15 AM
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