How will changes in FHA financing affect condo homebuyers?

By Deborah Goonan, Independent American Communities


FHA to ease condo financing, claims it will boost homeownership

If you’ve been following housing news over the past several years, you’ve probably read many articles on proposed revisions to FHA financing.

The HOA-industry, including trade group Community Associations Institute (CAI) and the National Association of Realtors (NAR) have been pushing their agenda to ease mortgage qualification standards for condos for several years.

Now it looks like stakeholders have finally convinced the Federal Housing Administration to finalize new lending guidelines, subject to a 30-day public comment period.

Several policy changes will go into effect as of October 15, 2019.

  • FHA is bringing back “spot loan approvals” for condominiums, allowing individual unit buyers to gain FHA mortgage approval. Loans can now be approved even when the housing project is still under construction, and does not yet qualify as an FHA-certified community. The catch is, the condo project must prove it is “financially stable,” and that’s a challenge for many so-called “affordable” housing associations.


  • Currently, only 6.5% of condo projects in the U.S. are FHA certified. Critics of the current system complain that the certification and recertification process is costly and burdensome. In response, FHA says it will now require re-certification every three years, instead of every two years.


  • The current administration will now allow for a higher percentage of commercial space in mixed-use condominium projects.


  • Additionally, FHA will now seriously consider approval of financing for condo units in communities with only 35% owner-occupancy. Furthermore, up to 75% of units in a single condo association can be purchased using FHA mortgages.


One small bright spot: new FHA guidelines still allow the administration to adjust acceptable owner-occupancy, commercial-occupancy, and FHA concentration ratios, depending on the financial health of the community.

That’s why, as a percentage of all home buyers in the U.S., IAC doesn’t expect a huge surge in FHA financed condominiums.

But HOA-industry stakeholders are celebrating, as they have long held that easier-money policies will increase the number of eligible first-time homebuyers in the market.

The industry’s obvious goal is to sell more condos.

And, to the uneducated housing consumer, the political agenda of pushing more first-time home buyers into lower-priced condos might seem like a good idea. After all, it is one way to provide an affordable path to homeownership.

But is it the right way?


New FHA policies won’t make homeownership more affordable

Upon careful consideration, it’s this author’s opinion that new HOA/condo industry driven FHA guidelines are bad policy.

First of all, it’s deceptive and misleading to sell condos as an “affordable” entry into homeownership. For the past five years, IAC has documented hundreds of examples of condo owners who were sucked into condo life by the low purchase price.

Within a few years, these homeowners are choking on much higher condo fees, and stressing over unexpected special assessments.

And, here’s another eye opener. IAC hears from owners across the U.S. on a regular basis. Many of them tell me that their condo fees now far exceed their monthly mortgage payments, including taxes and insurance.


Most condo crises not reported

The vast majority of these condo horror stories never get reported in the media. That’s because most owners caught in a cycle of unaffordable payments are desperately trying to sell their units.

Many do not succeed. They’re forced to either rent their units to tenants or simply walk away and pay the consequences of bankruptcy and bad credit ratings.

The winners in this condo game are investors who have the bankroll to pick up units at rock bottom prices, often through short sales and HOA or bank foreclosures.

That’s why many condo associations have such low owner-occupancy rates. Quite often, the only people who can afford to own them are investors who operate as landlords or short-term rental entrepreneurs.

That’s why IAC thinks it’s ironic that FHA is now willing to reduce the minimum owner-occupancy requirement from 50% to 35% of total units in a condo association.


Construction defects plague many condominium projects

It’s also no secret that the last housing boom dumped a lot of poorly-built housing into the U.S. real estate market.

Condominiums were especially hard-hit with construction defects, a fact that has been documented by the HOA industry trade group itself. (See CAI’s Too Close to Home report).

Shoddy construction. Bad apartment-to-condo conversions. The all-too-common deferred maintenance of multifamily stacked and townhouse condominiums.

For all of these reasons, homeowners find that they lose money on their “affordable” housing investment.

That’s especially true when they happen to be owner-occupants outnumbered by investor-owners in the community.

For a typical case study of a condo crisis, see the recently published research paper co-published with Michael and Shelly Marshall: HOA power relationship, problem-solving, and communication patterns during a major building renovation construction crisis.

(Citation: Michael J. Marshall, Shelly Marshall & Deborah Goonan (2018) HOA power relationship, problem-solving, and communication patterns during a major building renovation construction crisis, Housing and Society, 45:3, 186-205, DOI: 10.1080/08882746.2018.1529509)



Short term rentals turn American Dream into nightmares

Enter the Airbnb mess.

For quite a few condo owner-occupants, the rise of short-term rentals using online platforms has created plenty of unexpected lifestyle challenges.

Many first-time homeowners think they’ll be living next to other owner-occupants. They hope they’ll get to know their neighbors and make a few long-lasting friends.

Starry-eyed condo buyers often assume they’ll be able to lounge by the community pool in peace, use the community room for friendly gatherings, sleep peacefully at night, and return from a hard-day’s work to a maintenance-free home.


Condos as mini hotels?

Then reality set in, as several neighboring condo and townhouse units begin operating as mini-hotels. Out of town guests arrive daily, toting luggage. In vacation mode, they can be fond of partying until the wee hours of the morning.

Condo owners complain that the guests hog up the pool. Residents can’t use the clubhouse, because it always seems to be booked for special events such as bridal showers and bachelor parties.

How will FHA’s guideline allowing even more commercial use of property improve life for owner-occupants? It’s far more likely that restaurants, bars, coffee shops, and convenience stores will serve visitors and tourists than condo buyers seeking a stable long-term home.


Condo owners can lose their life savings

And what about the very real possibility of hostile condo takeovers, the deconversion of condominiums back to apartments?

Make no mistake: a low owner-occupancy rate greatly increases the risk that opportunistic investors will take over a condo corporation, terminate the association, and then force the owner-occupants to sell their condos at artificially low prices.

In most cases, investors win, owner-occupants lose.

That fact is well-documented by the media and discussed here on IAC.

Therefore, if FHA truly wants to “help” encourage and sustain entry into homeownership, then the administration should NOT be backing mortgage financing of common interest development of any kind, especially condominiums.♦



New FHA Guidelines Expand Access To Condo Mortgages
Brenda Richardson, Senior Contributor | Forbes
Aug 15, 2019, 08:04am

FHA to make financing easier for condo owners
Announces long-awaited changes to eligibility requirements that include individual unit approval
August 14, 2019
Jessica Guerin | HousingWire

Read the official FHA guidelines (124 pages):

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Parts 203, 206, and 234 [Docket No. FR-5715-F-02]
RIN 2502-AJ30
Project Approval for Single-Family Condominiums

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