Condo buyers and sellers, take heart.   The government has taken yet more action to help you buy and sell.

Effective October 1, 2009, the Federal Housing Administration made changes to help expand homeownership opportunities to those who might not otherwise qualify for an FHA home loan.

The FHA has always aimed to make homeownership possible to buyers who might not otherwise qualify to buy.   The FHA insures home loans against default for buyers with lower incomes, lower credit scores and lower down payments.     Buyers pay a monthly premium for this FHA protection.   Lenders like to see buyers with FHA protection and, in turn, tend to provide FHA-backed buyers with better loan terms and lower down payments.

The FHA’s mission is particularly relevant in today’s condo market.   Before the recent changes implemented by law on October 1, it would have been more difficult for condo associations to get FHA approval.     Some associations faced rejection by the FHA when not enough condo units were owner occupied.     Other associations could not provide enough evidence of financial fitness and were ultimately rejected by the FHA, who did not feel the associations were handling their funds properly (and improper handling of reserves can often mean expensive special assessments down the road for condo dwellers-not a good thing).

To risk oversimplifying, below are key components of the new rules for condo FHA approval:

A condo project must:

  • Include two units or more.
  • Have proper insurance.   At a minimum, hazard and liability insurance.   Some areas also require flood insurance.
  • Have the right of first refusal as long as it does not violate Fair Housing Act regulations (right of first refusal means that the condo board has the ability to weed out a buyer they judge as unhealthy for the condo community’s well-being—such as a buyer who refuses to provide information on income/assets.   Once such a buyer is weeded out, the board has the right to buy the unit for themselves if they wish).

Other regulations implemented by FHA:

Commercial Use:   No more than 25% of a project’s total floor area can be used commercially.

Investor Restrictions:     No more than 10% of the condos may be owned by one investor.

Minimum Units Sold:     FHA buyers cannot buy into a project until at least 50% of the total condo units are sold.

Triplex Limits:   A triplex condo property allows no more than 1 FHA-insured buyer.

Four or More Unit Limits:     Properties with four or more units will allow no more than 30% total units to be occupied by FHA-backed buyers.

Condo Association Reserve Studies:   Condo associations must provide a current study of their reserves (or money paid by condo owners that’s spent on such big ticket items as new roofing, new sidewalks and other projects).   A reserve study CANNOT be more than 12 months old.

Conversions:     For condo conversions, a project much be 100% completed before a buyer can be granted an FHA-backed loan.

Need clarification or more information?     Please contact me.   I can refer you to an experienced FHA-approved lender.

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