FHA Revises Condo Rules
Agency reduces barriers to financing, though
restrictions still hamper some investments. By Robert Freedman
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-commer-
cial 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 financ-
ing, including changing the condo-to-commercial
ratio that derailed Harvey’s transaction.
Under the ne w 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 photo by querbeet / iStockphoto ©2012
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 t wo changes touch on delinquent home
owner association dues and condo board certifica-
tion. 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, of- ficers had to confirm that they had “no knowledge
of circumstances or conditions” that could adversely
a;ect the building. But many representatives are vol-
unteers who have been reluctant to take on that legal
responsibility. The language has been softened and
now recognizes boards’ good-faith e;orts to verify
More Easing Ahead
The FHA may o;er 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.” W
SOARING NEED FOR FHA.
Broker George Harvey Jr. says
eased FHA condo rules could
help sales in popular condo
projects like the one in Eagle
View Reserve, Telluride, Colo.,
where he has done business.