Federal regulations that toughened certain mortgage requirements after the Great Recession are being relaxed, in what many experts believe will generate sales of condo homes in certain pockets of the country including Seattle/King County.
Mortgage lenders will now be permitted to more easily issue loans backed by the Federal Housing Administration (FHA) for single condo units rather than require qualification of the entire condominium building. Those with lower incomes and credit scores sometimes gravitate to FHA loans because of the down payment requirement of 3% of the agreed home price (and 3.5% for first-time buyers).
In a time when Seattle and other big cities are struggling to create housing that is both affordable and within reasonable distance of their job, this is big news for potential buyers as the changes open the door to a larger group of homes on the market. (In a separate move to help increase affordable housing, Seattle eased rules this year on the addition of accessible dwelling units – typically for rent – on single-family lots.)
The National Association of Realtors ® (NAR) believes the change will prompt more condominium properties to apply (or reapply) for FHA eligibility, increasing access to affordable housing for more people. Taking a cursory glance at the U.S. Housing and Urban Development (HUD) eligibility website, 93 Seattle-area condo communities are currently FHA certified (as of this writing) – but hundreds of others let their FHA status lapse over time, did not qualify or have never applied.
Our region’s surging housing market – where multiple offers on a single home were a common occurrence until this year – likely made it unnecessary for Homeowners Associations (HOAs) to keep up with their FHA status. Plus, the onerous refiling every two years – as required by HUD – prompted many HOAs to simply let their status expire.
In response to the decline in qualified condos, the FHA will extend to three years the certification renewal process. The agency will also include a six-month grace period to meet application requirements. Many condos did not reach certification status because of incomplete paperwork, according to the HUD website. This development, in theory, will alleviate some of the cost and time burdens on HOAs that wish to earn and maintain FHA status.
Until this change in policy, single-condo-unit FHA mortgages – known in the industry as spot approvals – were rare and can be costly and time-consuming to lenders filing on behalf of a single consumer. Now, the FHA will approve individual mortgage requests in a building when the entire property does not have its certification. Certain requirements remain: The property must have at least five units, include a limited concentration of FHA-insured homes, be at least 50% owner-occupied and have a maximum 35% commercial space (information that a responsible HOA should have on file for a lending team to examine).
The FHA, according to The Wall Street Journal, estimates the new rules could generate as many as 60,000 additional condo loans. That’s good news for people in Seattle, where single-family homes are increasingly out of reach of first-time buyers and condos are more likely an affordable option – though, outside of downtown where luxury homes are the mainstay and typically out of the grasp of FHA applicants. (Before the rules change, I found six condos in Belltown and one in Denny Triangle with approved FHA certifications – and none in downtown.)
Soon after this country’s financial and housing crisis in 2007-2009, the FHA tightened its lending policy for loans on condos, including the elimination of spot approvals. Even now, a decade after the turmoil, FHA-certified condos account for only about 7% of the nation’s 150,000 condo communities. And of the 8.7 million condo units in the U.S. today, only about 17,800 FHA loans were approved on those homes in the past year.
These new rules will certainly help boost those numbers. The changes take effect Oct. 15.
“Condominiums are often the most affordable option for first-time home buyers, small families and those in urban areas,” said NAR President John Smaby. “This ruling, which culminates years of collaboration between HUD and NAR, will help reverse recent declines in condo sales and ensure the FHA is fulfilling its primary mission to the American people.”