August 19, 2017

Realtors Ask For Less Restrictions on FHA Condo Financing

Many first time home buyers view the purchase of a condominium as their best option.  Condos are frequently priced below single family homes and can be an attractive choice for a home owner who does not want to be directly involved in tedious and time consuming maintenance and repairs.

Although the FHA mortgage program for the purchase of a single family owner occupied home is a relatively easy process, when it comes to condo financing, the FHA program is much more restrictive.

For example, if investors own more than 10% of the units in a condo development, the FHA does not allow FHA financing for the purchase of a unit in that condo complex.  Another restriction is placed on the total number of units in a condo that can be FHA financed with the current limitation at 50%.  The FHA will not do financing on a condo development unless at least 30% of the units are sold and this restriction will increase to 50% at the end of June.

Recognizing the fact that many first time home buyers prefer to purchase a condo instead of a single family home, the National Association of Realtors along with the National Association of Home Builders have joined in requesting that the FHA make financing for condos less restrictive.

Both organizations that are asking for relaxation of FHA rules on condo purchases would obviously benefit financially if the FHA eliminated some of the current rules restricting FHA financing on condo purchases.  Easier financing on condos would naturally result in more commissions and profits to realtors and condo builders.

The issue that should be examined prior to relaxing restrictions on FHA condo financing is whether a change in the rules would result in higher risk for purchasers.   The FHA’s mission is to promote stable home ownership.  FHA restrictions on condo purchases were established after weighing the  risks and rewards of condo ownership and were put in place to protect home buyers and minimize mortgage defaults.  Prior to making any changes in condo financing rules, the FHA should determine that risks to the FHA and the borrower are not increased.

The FHA’s current policies on condo purchases are designed to ensure that condo purchasers are making a financially sound decision and not taking undue risks.

For example, if a purchaser moves into a condo development in which only half of the units are sold, what are the risks involved if the other half of the units never get sold due to market conditions or other factors?  The people who purchased a unit in a condo development that stays half empty would soon find that the common charges would have to increase dramatically to cover maintenance and repair costs for the units that are unoccupied.  The resulting increase in the monthly common charge could result in defaults by some owners which would only further increase common charges on the remaining owners.

Sound and stable home ownership should remain the primary goal of the FHA.  Providing easy financing that results in mortgage defaults does not help the home owner, the FHA or the taxpayers.