New FHA condo rules may hinder mortgages

Holden Lewis / Bankrate.com

The Federal Housing Administration is ready to implement new rules that could, in some cases, make it harder to get a mortgage to buy a condominium unit.

The new rules were supposed to take effect Oct. 1. But the FHA has announced it would delay implementation of the new rules until Nov. 2, and says it might modify some of the policies.

Of the several new rules and requirements, there are four that most directly affect people who want to buy condos with FHA-insured mortgages:

• "Spot approvals" are eliminated, and now the entire condominium project has to meet FHA approval before a borrower can get an FHA-insured loan.

• A maximum of 30 percent of the 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 project's owners will have to occupy their units, down from 51 percent.

That last item is a slight liberalization of the rules, but Realtors and lenders argue that the owner-occupancy rule should be relaxed even more at a time when so many condo units are vacant.

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

The FHA matters because it allows borrowers to get mortgages with down payments as little as 3.5 percent. Conventional mortgages-- those that aren't government-insured -- require down payments of at least 10 percent and sometimes a lot more. Because the FHA requires smaller down payments and goes easier on people with low credit scores, about one-third of homebuyers in the United States are getting FHA loans this year.