Starting October 1, 2009, HUD has new rules for FHA loans that will change the playing field for condo buyers, sellers and builders. I just read the letter from HUD to FHA lenders and appraisers (MORTGAGEE LETTER 2009-19) along with some blogs on how this will affect the condo market.
The reason this is such a big deal is that right now an FHA loan is the only way to buy a Salt Lake City condo or home with a low down payment of 3.5%.
Here’s an overview of some of the requirements that a condo project will require to be eligible for FHA financing starting October 1, 2009. I’ve made a few comments:
1. At least 50% of the total units must be sold prior to endorsement of any FHA mortgage on a unit. This will affect new construction!
2. At least 50% of the units must be owner-occupied or sold to owners who intend to occupy the units. There have always been owner-occupied rules for FHA.
3. Projects of four or more units will have no more than 30% of total units insured by FHA. Projects with three or less units will have no more than one FHA insured unit. This is a big change!
4. No more than 15% of total units can be in arrears (more than 30 days past due) of their condominium association fee payment. Seems to make sense to me.
5. No more than 25% of property’s total floor area can be used for commercial purposes.
6. One investor may own no more than 10% of units. This applies to developers/builders that rent vacant and unsold units. This makes sense.
7. For two and three unit projects, no single entity may own more than one unit; all units and common areas must be 100% complete; and only one unit can be conveyed to non-owner occupants.
8. A current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. A current study must be no more than 12 months old—if recent events or market conditions have affected the finished condition of the property that information must be included. When reviewing the study, consideration must be given to items that have been replaced after the time that the reserve study was completed. This makes sense to me. Why should we lend money to buy condos in a condo project that isn’t properly managed?
9. No more FHA Spot approval on individual condo units in non-FHA approved projects. The project is either FHA approved or it’s not. Seems like this is a safe approach for a big organization like HUD.
These new rules will most likely have a short term negative effect on the value of Salt Lake City condos and condos across our nation.
New construction condos will be affected the most because 50% of the units will need to be sold before the condo project could become eligible for FHA financing.
Builders will need to make sure they have a way to finance the first 50% of the condo units they sell. The builders will need to go out and find financing for their units and then once the units are half sold, FHA financing becomes available if they are approved. This puts a lot more risk on the builders and their lenders and less on FHA/HUD.
These new rules will likely reduce the number of risky condo projects and the overall number of new condo projects being built. Long term, condo inventories will decrease which should push values up.
Also, if you can’t buy a condo, you can still buy a single family home with an FHA loan. Short term this could have a positive effect on the value of single family homes in Salt Lake City because more people will buy homes instead of condos.
During the last housing boom in Salt Lake City, 2005-2007, the value of homes out paced condos until the gap was big enough to pull condos up. The same thing could happen again.
So short term the FHA loan changes for condos will probably have a negative effect on values, but long term this will probably lead to decreasing condo inventory which could have a positive affect on the value of existing condos.
This also could result in new loan products for condos with low down payments. Also, FHA may modify these new rules as they see how it affects the condo market. Rules can be changed.
If you need help with the purchase of a Salt Lake City home, condo or duplex, please contact me. I’ve been a Salt Lake City realtor for over 10 years and this year 85% of my clients have been Buyers of homes and condos in Salt Lake.
Associate Broker, MBA
Stonebrook Real Estate