Sue Fox, @Properties. Direct 773.816.1788

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Tangled up in FHA: Chicago condo buyers grapple with fresh mortgage headaches as new rules arrive

filed under: Buyers, FHA loans, First-time buyers, Market conditions posted on February 3rd, 2010

Already a thicket of red tape, FHA rules are now even rougher on Chicago condo buyers.

THE FHA BLUES: New rules will make it even harder for Chicago home buyers to find a condo that qualifies for an FHA loan.

Effective Feb. 1,  the Federal Housing Administration’s new rules for insuring condo loans are just starting to flummox buyers who had hoped to use an FHA loan. Since FHA requires just 3.5% down, these mortgages have grown increasingly popular in the last year as other low-down-payment options dried up.

But using FHA to buy a condo always involved a few extra spools of red tape. Unless the condo building in question was already FHA-approved, buyers had to seek a “spot approval,” which meant more requirements to be met and paperwork to be filed by both the borrower and the condo association. Now, however, the government has abolished spot approvals.

To obtain an FHA loan now for a Chicago condo (or any other condo), the entire building now must be FHA-approved. This could throw a substantial monkey wrench in the works, as Chicago condo buyers and sellers scramble to win FHA approval in the next few months — especially before the home buyers’ tax credits expire at the end of April!

“I think it’s going to be a few rocky months until everyone gets their arms around this,” a Chase mortgage loan officer told me today. Basically, under the new rules, condo associations better have their ducks in a row or else they are cutting themselves off from approximately 25% of buyers now using FHA.

Among the FHA’s new condo rules:

• The property must be for residential use and occupied by the owner.

• At least 50% of the total units in the project must be sold.

• At least 50% of the units must be owner-occupied or sold to owners who intend to occupy the units.

• No more than 10 percent of the units may be owned by one investor. This will apply to developers who have rented out vacant and unsold units. For two and three-unit condo buildings, no single entity may own more than one unit.

• All of the units, common elements, and facilities within the project must be 100 percent complete.

• No more than 15% of the total units can be late on their condo assessments (more than 30 days past due).

• Projects in designated wetland and flood zones will not qualify for FHA insurance. There are also restrictions on condos located near airports, railroads, highways or landfills.

It’s ironic that FHA is tightening its rules now, with just three months to go until the home buyer’s tax credits expire. Will this push more buyers into single-family homes rather than condos? Or will they make do with the limited list of condo projects that have already earned the FHA approval stamp? Or will buyers will other means scrap FHA altogether and try to get a conventional loan with a bigger down payment?

Written by Sue Fox //

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