New FHA rule will make it harder to obtain a condo home loanIt may be a buyer's market for those looking to purchase a condominium, but a new FHA rule putting an end to "spot approvals" for home loans may burst the shopping bubble and make it much more difficult to qualify for a loan.
By extension, the same rule may also mean more bad news for condo sellers, already suffering through a bad economy which has sent property values into the Dumpster, since it impedes buyers' ability to purchase. And the financial pain could eventually spread to all homeowners by way of higher property taxes, say experts.
What is happening: Beginning Nov. 1, a new Federal Housing Administration rule goes into effect that disallows a loan process called "spot approvals," which gave loan underwriters the authority to approve individual units rather than an entire building.
The reason such authority was so helpful to buyers is the cost and paperwork for a condo association to get an entire building approved by the FHA is onerous at best, costing tens of thousands of dollars for appraisals, structural engineering reports and other reports.
Spot approvals, in comparison, only require an association representative to spend 15 minutes filling out a single-page form. Those loans are prized by buyers because they generally have lower interest rates and require much lower down payments, about 3.5 percent of the purchase price compared with conventional bank loans, which may require up to 30 percent down.
Now, without spot approvals, condo buyers and owners will not be able to get an FHA loan for units in a non-approved building and will have to rely on conventional bank loans or pay cash.
"This poses a potential downward trend in condo values because many people can't afford to put such a large down payment down on a condo," Lawrence Vecchio Broker Better Homes said. "And if there is a smaller pool of buyers, the market value of condos will decline even further and a condo unit will only be worth what a cash buyer is willing to pay for it."
Ripple effect: It also stands to compound the current real estate market problems that have caused cities to raise tax rates, Vecchio said. "Single family homeowners may think this doesn't affect them, but indirectly it will. When the condo assessed valuations plummet, our collective tax base will decline. Single family homeowners will pick up the slack with a hike in the millage rates and property taxes."
What you can do: Board members should check the federal Housing and Urban Development (the department that oversees the FHA) website https://entp.hud.gov/idapp/html/condlook.cfm to determine whether their condominium complex is on HUD's approved list.