One of the simplest ways to obtain a mortgage for a first-time homebuyer – or for anyone who might not have terrific credit and a big down payment – is a loan insured by the Federal Housing Administration.
The FHA doesn’t make loans, but it insures them for lenders. This makes lenders much more willing to offer a mortgage, because if the borrower defaults, the FHA will be on the hook.
FHA loans often require a down payment of as little as 3.5 percent, and can be obtained in many cases by people who have iffy credit or who have a bankruptcy or foreclosure in their past.
The catch is that borrowers have to pay mortgage insurance. Actually, they usually have to pay two types of insurance – an upfront payment of 1.75 percent of the loan amount (which can be rolled into the loan), and a monthly payment that depends on the length of the loan and the loan-to-value ratio.
The FHA insures loans for both single-family homes and condominiums. But a few years ago, the agency tightened up its rules for condos. This had the effect of dramatically reducing the number of condo communities for which it was possible to get an FHA loan.
Now, however, the FHA has loosened the rules again. This should make far more condos eligible for FHA-backed financing.
Here’s a look at the most important changes:
- Previously, the FHA wouldn’t insure loans for any units in a condo if 15% of the unit owners were 30 days behind in their condo fee payments. This was a huge problem, because 30 days is a very short time. The new rule changes the 30-day period to 60 days.
- In the past, the FHA wouldn’t back loans for any units in a condo complex if a single person or entity owned more than 10% of the units. That meant that if one person bought three units in a 29-unit complex as an investment, every unit in the entire complex would become ineligible for an FHA loan. It also meant that if a developer had trouble selling all the units in a new building right away, and kept slightly more than 10% for rental purposes, the whole complex would be disqualified. Now, though, the FHA says a single investor can own up to 50% of the units.
- Before, the FHA wouldn’t insure a condo if more than 25% of the floor space was used for commercial purposes. This was bad news for a lot of urban condos that rely on retail stores or offices on the street level. The new rule allows commercial use of 35% of the floor space, and up to 50% in certain cases.
- In the past, in order for a condo to qualify, the condo officers had to certify that they had no knowledge of any reason why a mortgage might become delinquent, of any dissatisfaction among unit owners with the management, or of any disputes concerning unit owners. If the officers were found to have knowingly made a false statement, they could face fines up to $1 million and 30 years in jail. While such extreme punishments were highly unlikely, this requirement scared a lot of board members. The FHA is now replacing the language with less frightening terms.
The agency seems to be admitting that its earlier rules were just too strict. By some estimates, less than 10 percent of the condo associations in the country would qualify under the old rules. In any event, the FHA estimated at the start of 2012 that it would insure more than 110,000 condo units that year, and thanks to the tough rules, the total was only about 35,000.
With the looser rules in place in 2013, it should be much easier for condo buyers to get a mortgage. This will be a boon to both buyers and sellers of condo units.