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New FHA Condo-Buying Rules Rile Realtors and Builders

New FHA Condo-Buying Rules Rile Realtors and Builders

(WASHINGTON, D.C.) -- New FHA condo-buying rules set to begin Nov. 2 have the National Association of Realtors and the National Association of Home Builders seeing red - as in waving a red flag in front a rushing bull.

The FHA, however, is studying ways to revise and soften their regs before the deadline arrives.
is reporting the Federal Housing Administration's proposed new regulations could force some buyers out of the condo market - a market they dearly embrace because of its low 3.5 percent minimum down payment requirement, the lowest in the nation.

By contrast, conventional mortgage loans today require a minimum 10 percent down and in some markets, 20 percent.

Four of the FHA's several new rules directly affect buyers who hope to qualify for an FHA-insured mortgage, according to
  • "Spot approvals" are eliminated, and now the entire project has to meet FHA approval before a borrower can get an FHA-insured loan.

  • A maximum of 30 percent of the condo project's units can have FHA-insured mortgages. There was no such limitation previously.

  • Before the FHA will insure a mortgage on a condo, at least half the units must have already been sold. Again, there was no such limitation previously.

  • At least half of the condo project's property owners will have to occupy their units, down from 51 percent.

"If you're trying to encourage real estate ownership, then why would you make it so much more difficult?" says Ellen Bitton, president of New York-based Park Avenue Mortgage Group. "The people in the buildings will see a further deterioration in their values because nobody can get financing."

Because the FHA requires smaller down payments and goes easier on people with low credit scores, about one-third of homebuyers are getting FHA loans this year, according to

Before the FHA will insure a loan on a condo unit, the entire condo project has to meet FHA guidelines regarding the financial health of the condominium association as well as fair-housing issues and the condo's location.

"It takes time and money to get FHA approval of a condo project," notes

Since 1996, borrowers have been able to get spot approvals, in which the FHA insures a loan on a condo, although the entire project hasn't been approved.

"It's a way around having to get a whole project approved if you're just sort of the average buyer and you happen to find a condo unit in a not-approved project," says Jerry Nagy, senior regulatory policy representative for the National Association of Realtors.

An FHA letter says eliminating spot approvals will make it easier, cheaper and faster to get entire projects approved.

The "processes have been streamlined," the FHA says, "eliminating the need to approve units on a 'spot loan' basis."

But the Realtors argue that the spot approval loophole is a handy tool to have, and that withdrawing it will limit consumer choice, says Nagy.

To reduce its exposure to losses, the FHA won't insure a condo unit if 30 percent or more of the units in the project already have FHA-insured loans.

"This means that you could find a condo that you want to buy, but you can't get an FHA-insured loan because too many people in the building already have FHA loans," states "If you can't afford the larger down payment on a conventional mortgage, you could be out of luck."

The Realtors and the National Association of Home Builders have asked the FHA to eliminate or raise the limit. The NAHB says the rule "would have an extremely negative impact on the condominium market."

When a developer builds a condo project, the FHA won't insure a loan until at least half of the units have been sold.

"That presents a chicken-and-egg problem," points out  "People can't buy with FHA-insured loans because other people couldn't buy with FHA-insured loans."

 The FHA instituted this requirement to reduce its exposure to potential losses and to fight fraud.


Charles McMillan

Charles McMillan, president of the Realtors, asked the FHA to eliminate this rule or reduce the requirement to below 50 percent to give buyers more choices and to "reduce the number of vacant units in the market."

Fannie Mae and Freddie Mac require up to 70 percent of the units in a project to be sold before they back a loan.

"It used to be, if FHA approved a building, they would make a loan to every unit in the development," David Dessner, director of sales for New York City-based mortgage lender GuardHill Financial, tells The new requirements, if they are not changed, "leave a lot of people in the dust," he says. 

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