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from Local Attorney, Michael H. Wasserman

Thursday, June 18, 2009

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.

HB0155 APPROVED - WOULD BAR CONDO RIGHTS OF FIRST REFUSAL

Back in March, I wrote about HB0155.

The bill would effectively prohibit a condominium from exercising a right of first refusal to bar a potential buyer from purchasing a unit because that buyer wants to finance the deal with an FHA loan. That bill, slightly amended, has passed out of the State House & Senate and awaits the Governor's signature or veto (more on that below).

Many Condo Declarations contain a broad rights of first refusal over sale contracts. FHA lending guidelines prohibit them, that is to say, they will not lend to buyers wishing to purchase into associations that restrict sales in this manner. (Don't get me started on the "logic" behind the guideline - I have only seen the right actually exercised once in the last 10 years).

This new law would simply tell Condo Associations - hey, don't even think of exercising that right you aren't going to use anyway.

So if we ban Associations from asserting the right of first refusal, does that mean that the FHA will lend? I don't know. I hope so, but I have not seen anything from FHA or anywhere else that suggests that the law will trump the guideline or that HUD will change the guideline. After all, the right of first refusal will still exist, even if it cannot be exercised. The law could be repealed, or ruled unconstitutional by the Courts. If the FHA feels so strongly about re-sale restrictions, is it going to take that risk?

But perhaps the more interesting questions right is this one:

Will the Governor sign the bill?
HB0155 joins 498 others awaiting the Governor's action (House Bills: 356) (Senate Bills: 143)

(Apparently they may have run out of pens in Springfield due to the budget crisis)