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FHA: Tough new rules for condos

filed under: Buyers, FHA loans, First-time buyers, Market conditions posted on October 7th, 2009

With more buyers using FHA, the government is cracking down on condo loans.

With more buyers using FHA, the government is cracking down on condo loans.

FHA mortgages have exploded in popularity this year. With low down payments (typically just 3.5%) and competitive interest rates, these government-backed loans now account for a quarter of home purchases. But if you thought using FHA to buy a condo was complicated before (see my July 24 post), just wait!

Starting Dec. 7, the Federal Housing Administration will enforce new rules that could make the red tape ensnaring condo loans even stickier. In an effort to limit its risk, the FHA will no longer approve mortgages in condo buildings where 30% or more of the units were already financed by the FHA. For new developments, the developer must get the entire project approved before the FHA will authorize loans there, and half of the units must be sold off first before FHA will open its pocketbook.

Even in existing developments, sellers will now have to get the whole building approved by the FHA before a buyer can use this type of loan. I predict lots of sticky situations with condo boards, as anxious sellers try to persuade their neighbors that it’s worth the time, effort and money to get their building approved.

What does all this mean? Basically, it’s about to get a lot harder to buy (or sell) a condo. Chicago’s condo market is already bleeding, with sales down 19% in the last year, and the new rules will further constrict the flow of money available to finance such sales.

It will become increasing difficult to buy condos in new developments. And the government’s revised rules are bound to ripple across the non-FHA market as well, because all condo buyers ought to care whether or not people can use FHA loans in their building. If they can’t, after all, it will make it that much harder to resell the unit down the road.

Written by Sue Fox // Please leave a comment.

Lakeview development slashes prices

filed under: Buyers, Developments, FHA loans, First-time buyers, Lakeview posted on August 10th, 2009

Prices are on the chopping block this month at 2930 N Sheridan in Lakeview.

Prices are on the chopping block this month at 2930 N Sheridan in Lakeview.

As summer draws to an end, we are seeing more large developers cut prices in an effort to spur sales. The latest example is an FHA-approved building at 2930 N Sheridan, a rehabbed tower that looks a bit drab from the outside. Sales here have been sluggish for two years, and this week the sales center is announcing substantial price cuts.

One-bedroom units now start at $209,900, rather than $249,900. Two-bedroom condos are $229,900 (a $40,000 drop) and three bedrooms can be had for $299,900 (a $50,000 cut).

A new three-bedroom condo in Lakeview for under $300,000? This really is a buyer’s market. Inside the building, the units are bright and modern. But they don’t have balconies, and the brownish mid-century facade outside doesn’t offer much curb appeal. Still, FHA approval means that buyers only have to put 3.5% down, and if they close before Nov. 30 first-time buyers can take advantage of the government’s $8000 tax credit.

Written by Sue Fox // Please leave a comment.

Patience is a virtue: Using FHA to buy a condo

filed under: Buyers, FHA loans, First-time buyers posted on July 24th, 2009

Thanks to FHA and a little patience, LaTonya Wilkins (and her dog, Jaden) are now happily ensconced in their new condo.

Thanks to FHA and a little patience, LaTonya Wilkins (and her dog, Jayden) are now happily ensconced in their new Edgewater condo.

At a time when most lenders require home buyers to put at least 10% down, Federal Housing Administration (FHA) loans are looking increasingly attractive. They only require 3.5% down, they often boast good interest rates, and with no income limits, even affluent borrowers can use these federally-insured mortgages to complete their home purchases. What’s not to like?

In short, FHA loans come with a lot of strings attached, particularly for condo buyers. Because the loan is backed by the government, each property must meet a long list of requirements — everything from “no peeling paint” on a house to “no special assessments” on a condo. For houses, the requirements can usually be met because the buyer and seller arrange to have any mandated repair work done before the loan closes.  But with condos, the deals often hinge on factors that neither the buyer or seller can control.

For example, if you want to buy a condo using FHA, you need to pick a place where construction is complete. The condo association must have been in existence for at least a year. There can’t be any special assessments. The building must be at least 51% owner-occupied. And so on.

In my experience, this rules out many new developments — and in Chicago, that’s a real drawback. Many of my condo buyers want new or gut-rehabbed units. Using FHA may spare them a hefty down-payment, but it also dramatically restricts their choices.

Another problem is that even if the seller’s realtor says “FHA should be no problem!” (and they all say that), getting FHA spot approval (the term for approving an individual unit in the building) often requires buyers to jump through a frustrating series of hoops, with no guarantee that FHA will actually agree to the loan.

“Going through the government was harder than I thought,” said LaTonya Wilkins, one of my buyers who recently used FHA to buy a two-bedroom condo in Edgewater. “What was most frustrating was I didn’t feel like I had control of the process, even though I had good credit and a good job.”

In Wilkins’ case, the deal hit a snag when — three weeks into the loan approval process — the lender learned that there was still a special assessment lingering over some units in the building, but not the one Wilkins was buying. The building had replaced its rear porches, and some owners who didn’t have the cash to pay their share in full were still paying the debt off monthly. A perfect example of a willing seller, a qualified buyer — and some FHA rule that neither could control!

After appeals from the lender to various FHA bureaucrats, an exception was granted and the deal closed as planned. But like all things FHA, it required a great deal of patience (and tons of paperwork), especially for the buyer.

Was it worth it? At the end of the day, Wilkins ended up getting a great interest rate and a low down-payment. If you are a buyer who doesn’t need a brand-new condo, and who is willing to deal with all the hurdles, FHA may have a deal for you.

Written by Sue Fox // 1 Comment »

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