Call it a housing policy head fake — one with potentially painful consequences for moderate-income buyers, sellers and seniors in hundreds of condominium projects around the country. If you were thinking about purchasing a condo unit with a low-down-payment Federal Housing Administration mortgage in the coming year, this could affect you.
Last week, ostensibly yielding to a congressional mandate to make consumer-friendly FHA mortgages more widely available in condominiums, the government announced a move to do precisely that: Starting immediately, projects with fewer than half of their units occupied by owners may be eligible for certification for FHA financing. Under “certain circumstances,” the government said, projects with as low as 35 percent owner occupancy might now be eligible.
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A financial report due out soon could reignite a battle over whether the Federal Housing Administration should again reduce its annual premium.
The FHA last cut premiums in January 2015, a move that unleashed a lot of pent-up demand for agency-insured mortgages. While many in the industry have been urging FHA to make another cut, the agency has resisted due to concerns about its reserve fund, which rebounded last year but is still being watched carefully by nervous lawmakers.
But the agency is likely to come under more intense pressure to make another cut if independent auditors give the fund a positive review in a report due out in early November.
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For many condominium buyers and sellers, the Obama administration delivered what seemed like encouraging news last week: The Federal Housing Administration, once the primary source of mortgage financing for moderate-income and first-time condo buyers, is coming back, big time.
But the real story was more complex.
Under new reform proposals, FHA plans to loosen some of its controversial and strict eligibility rules that have caused condo associations nationwide to abandon the program. It also wants to revive what are called “spot loans” — mortgages for individual units in condo buildings that haven’t received blanket certifications from the agency. That change alone could open up low-down-payment financing for millennials, minorities and others in many of the estimated 150,000-plus condo projects in the United States. The Community Associations Institute estimates that just 14,000 condo projects nationwide — less than 10 percent of the total — are now certified for FHA-insured mortgages.
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In response to changing conditions in the condominium market, the Federal Housing Administration (FHA) this past week proposed new regulations governing the approval process for condominium developments.
FHA is seeking to widen the range of thresholds required for FHA approval including the minimum owner-occupants in approved condo developments and limits on commercial/non-residential space. Ultimately, FHA will have the ability to specify new owner-occupancy, commercial/non-residential, and single-unit thresholds.
FHA currently requires that approved condominium developments have a minimum of 50% of the units occupied by owners. While having too few owner-occupants can detract from the viability of a project, requiring too many can harm its marketability, the agency said.
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The National Association of Realtors is calling on the Department of Housing and Urban Development to speed up implementation of reforms to the Federal Housing Administration’s condominium reforms.
Legislation signed by President Obama in July that makes numerous reforms to government housing programs included provisions that reduce restrictions on condominium buildings being FHA approved so that more FHA borrowers can purchase condominium units.
The Realtors are hoping HUD will issue an interim proposed rule soon that will allow some of the condo provisions to go into effect right away. But some in the housing industry worry a slow rulemaking process could delay implementation to after the November elections and the transition to a new administration. The Realtors estimate that less than 10% of condominiums currently qualify for FHA mortgage insurance.
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After three months of house hunting, auto technician Mahyar Abab and his wife, teacher Ana Abab Marques, are in escrow to buy a home in the Mission Courts condos in Rancho Santa Margarita.
But landing an Orange County home of their own for under $400,000 wasn’t exactly a picnic.
As first-time homebuyers using Federal Housing Administration (FHA) financing, only about half of the condos on the market had the necessary certification that would allow them to buy, said their agent, Bob Wolff.
And without FHA, the Ababs would continue to be renters. With FHA, they only need to put about $13,000 down, or 3.5 percent of the purchase price.
“It’s hard to save for the down payment. It’s hard to save for the closing costs,” said Ana, 44. “Also the price is a little high at this time. And there’s a lot of competition. We made an offer on five places.”
The Ababs were competing with buyers paying 10 to 20 percent down, and in some cases, paying all cash. Some sellers also believe – erroneously, Wolff says – that the FHA process is more rigorous than conventional financing.
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Could the Federal Housing Administration finally be opening its doors again to financing more condominium units? If so, that could be excellent news for young, first-time buyers and for seniors who own condo units and need a reverse mortgage to supplement their post-retirement incomes.
Here’s why: FHA financing offers not only 3.5 percent minimum down payments but is far more lenient than other options on crucial issues such as credit scores and debt-to-income ratios. Plus FHA is the dominant source of insured reverse mortgages — the only game in town for the vast majority of seniors.
But if a condo building is not certified as eligible for financing by FHA, all the individual units in the project are ineligible for mortgage financing as well. Young families can’t buy using FHA loans, sellers can’t sell and seniors can’t tap their equity through a reverse mortgage. It used to be different — for years FHA allowed so-called “spot” loans on individual units — but no more.
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A recent decision by the U.S. Department of Housing and Urban Development (HUD) says landlords can’t broadly deny housing to people with criminal histories, and that rubs Rep. Daniel Donovan the wrong way.
The new HUD guidelines say because of the high rate of incarceration of blacks and Latinos, denying housing to someone with a criminal background could be de facto discrimination.
“Across the United States, African Americans and Hispanics are arrested, convicted and incarcerated at rates disproportionate to their share of the general population,” the memo reads. “Consequently, criminal records-based barriers to housing are likely to have a disproportionate impact on minority home seekers.”
The Fair Housing Act (FHA) makes it illegal for a housing provider to deny housing to someone due to discrimination based on race, color, religion, sex, national origin or family status.
While criminal history isn’t listed, HUD has interpreted the act to extend to those minorities whose criminal backgrounds might be used against them to deny them housing.
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If you’re planning to buy a home with a low down payment, you need to be aware of some important but virtually unpublicized price changes underway in the mortgage market.
If you’ve got good but not great credit, such as a FICO score in the mid to upper 600s, you’re going to get hit with higher fees on a conventional (non-government) loan with a low down payment. Count on it. On the other hand, if you’re part of the credit elite — your FICO score is 760 or higher — congratulations: You’re in line for an unexpected discount on fees, despite making a tiny down payment.
What’s going on? Put simply, the mortgage insurance premiums on loans eligible for sale to giant investors Fannie Mae and Freddie Mac underwent a shake-up this month. Applicants with lower scores and smaller down payments got whacked.
To illustrate: According to one mortgage insurer’s rate sheet, the buyer of a $400,000 house with a 660 FICO, a 3 percent down payment and a fixed rate of 4 1/8 percent would have paid $2,359 a month in principal, interest and mortgage insurance before the premium changes took effect April 4. Today, the same borrower would be charged $2,495 a month — $136 more a month, $1,632 more a year. But a borrower with a 760 FICO seeking the same size loan with a rate of 3 7/8 percent would now be charged $162 less per month — $2,002 vs. $2,164 — because of the pricing revisions.
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Did you know a homeowners association could have an impact on whether you can buy a condominium with a government-backed loan?
As of 2009, both the Federal Housing Administration and Department of Veterans Affairs require a condominium’s homeowners association to be approved before a buyer can get a loan for a home in that complex.
“A lot of condo boards still don’t realize this has happened,” said Andrew Fortin, senior vice president of external affairs at Associa, a community management association. “It’s not a hard process, but it’s a very technically challenging one. The burden is on the association.”
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