Tighter lending requirements for Federal Housing Administration (FHA)-backed condo mortgages have put financial and administrative pressure on HOAs all over the country at a time when many are ill prepared for any new challenges.
The most onerous of the new requirements are mandated reserve fund contributions, a 15 percent limit on condo fees delinquencies, and the specification that the condominium itself obtain FHA approval—this resulting in reams of additional paperwork for community associations. The new requirements aren’t mandatory, but they do affect the ability of owners to sell their units. FHA-backed loans have taken over the lion’s share in some markets because they allow modest 3.5 percent down payments, making them the only option for many first-time buyers and others without a lot of cash on hand.
Condos that don’t seek FHA-approval under the new guidelines could find themselves losing property values and community support, warned White Plains-based National Condo Advisors CEO Orest Tomaselli at The New Jersey Cooperator's annual Condo, HOA & Co-op Expo earlier this spring. “If there is no financing [for condo sales]," says Tomaselli, whose firm helps condos achieve FHA approval. "People start paying their maintenance [fees] late. People stop caring about the development because they can’t refinance. They can’t get out, they can’t sell their units, nobody can buy. It’s a problem."
The details of the new FHA guidelines were announced in February of this year, says Ray Lamberti Jr., a home mortgage representative with Wells Fargo. The changes were initiated as a means of addressing the increased risk in the housing market and strengthening the FHA's capital reserves, thus improving their financial position and ensuring their long-term ability to guarantee affordable mortgages.
"Under the new guidelines, mortgage insurance premiums (MIP) increased from 1.75 percent to 2.25 percent of the loan amount," he says. "In addition, there was a reduction of the allowable amount of seller concessions to the buyer from six percent to three percent. In the past, sellers could offer up to six percent of the home's closing cost to the buyer as an incentive if the buyer used an FHA mortgage; now, the allowable concession is only three percent of the closing cost."