The Federal Housing Administration (FHA) is preparing to change its rules on condominiums (condos) that currently cause large numbers of units to be ineligible for low-downpayment insured mortgages. Under the FHA’s current regulations, only 25% of all condo projects potentially eligible for FHA-financing are approved.

The FHA’s condo mortgage requirements have denied many buyers mortgages, further aggravating the real estate recovery. To be eligible for FHA-financing, current controversial FHA limitations on condo mortgages require:

  • no more than 50% of the units in a building to be non-owner-occupied ; and
  • no more than 25% of the total floor space in a condo project to be for commercial use.

Further:

  • the FHA does not approve any condo projects where over 15% of the units are 30 days or more behind on fee payments to their homeowners’ association (HOA); and
  • buyers using FHA-insured mortgages cannot purchase individual condo units in a building unless all of the property meets FHA requirements.

Although the FHA defends these regulations as necessary to avoid losses, the administration has now decided to allow revisions that will permit units in more HOA projects to be financed with FHA-insured mortgages.

Whether or not the proposed changes will be enough to mitigate obstacles for large numbers of buyers and sellers is unknown. Still, prospective condo buyers welcome any loosening of current FHA restrictions, especially as FHA financing remains the primary mortgage choice for half of all condo buyers.

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Allowing lenders to relax regulations for HOAs will relieve further downward pressure on prices for condos in HOAs that were not properly managed or capitalized. As a result, a condo development not previously qualified for the sale of units to buyers obtaining FHA-financing will experience an increase in real estate transactions. With current low prices, that will certainly draw the attention of speculators, thus artificially (and quickly) inflating unit prices above equilibrium levels.

Still, a financial crisis is an appropriate time for the government to pump up the economy, with the loosening of restrictions on improperly managed condos being a fitting measure. The temporary rise in condo unit prices due to speculator “flip” activity will eventually fall to natural levels as the economy stabilizes. By then, the FHA will need to reel in the relaxed rules on mismanaged HOAs by tightening requirements regarding conduct once the recovery has gained momentum.

For now, the FHA’s decision to ease its restrictions on condos will without a doubt stimulate the real estate market (and by extension the greater economy) by allowing more properties to be sold, as well as by increasing employment for those involved in the real estate transaction process.

Related article:
Rules for FHA insured purchase loans for condos to be tightened once again?

Re: FHA may loosen limits on condo mortgages from L.A. Times