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New FHA Legislation Brings Good News for Condo Buyers and Owners
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The Housing Opportunity Through Modernization Act of 2016 (HR 3700) was signed into law by President Obama on July 29, 2016. Since then, a major focus of the law has been to provide consumers and their representatives with guidance and insight into the new FHA requirements regarding condominium mortgage insurance. The intention is to ease FHA condo financing rules to provide condo buyers easier access to financing and thus increase condo sales.
Ken Harney provided background on why many felt HR 3700 was necessary in his article in the Chicago Tribune:
“Critics pointed out that FHA once was the go-to source of condo financing for first-time buyers, but since 2010 its role has shrunk drastically. FHA helped finance 80,000 to 90,000 condo mortgages a year during the previous decade and a half, but more recently production has dwindled to barely a quarter of that volume. FHA condo lending in the first three months of this year plunged by 8.6 percent from the previous quarter, according to Inside Mortgage Finance, a trade publication. In the final quarter of last year, volume declined by 20.3 percent from the third quarter.
The agency's restrictions on condo community eligibility for financing became so onerous — requiring complicated re-certifications of entire developments every two years — that thousands of condo associations abandoned the program. According to the Community Associations Institute, fewer than 14,000 of the 152,000 condo associations in the U.S. are now eligible for FHA loans. Individual units are not eligible for FHA financing unless the entire association's finances, reserves, insurance, budget and other items have been approved by the government.”
As a result of the heavier governmental financing restrictions in the past six years, causing an increase in troubled condo associations who are still having problems with staying viable due to the mortgage meltdown and the more stringent FHA financing restrictions, numerous groups and associations lobbied the federal government to make FHA condo financing more accessible.
HR 3700 presents new guidelines to FHA’s condo rules to increase homeownership and ease of financing for condominium units, thus making homeownership more affordable and abundant while buoying up many HOAs across the country. Some of the new guidelines include the reduction of the FHA condo owner occupancy ratio from 50% to 35%. (FHA tentatively has 90 days from the passage of the act to make that guideline permanent.)
Besides the condo owner occupancy ratio reduction in a development, HR 3700 also now allows transfer fees in an FHA financing transaction. The legislation directs FHA to stop rejecting condo communities for approval because they collect small transfer fees when units are sold. The thinking is that the funds collected are used to support association activities which benefit all community members. FHA will now have to follow the lead of Fannie Mae and Freddie Mac, both of whom consider community-benefit transfer fees acceptable when financing a condominium.
The legislation also provides for more flexibility on the amount of commercial space permitted in condo developments. Many urban condos are now designed for mixed-use which means residential and commercial use are combined into one building or complex. Prior to HR 3700, some of these developments were ineligible because FHA set strict guidelines for commercial floor ratio to residential square footage, thus making the commercial floor ratio component excessive. The new legislation now requires FHA to be more flexible by taking the local market context into account.
Some critics of HR 3700 are concerned that the legislation, which also eased accessibility to low-income government housing assistance, will drain some of the money to help condo-buyers that HR 3700 was meant to free up. With the push and pull over limited available federal housing money, the future of homeownership for many could be restrained. That in turn would affect the many condominium homeowners associations across the country that depend on a constant supply of viable condo buyers to contribute to HOA dues and reserves.
Whether FHA can quickly implement the new guidelines for condo-buyers while keeping the new program solvent, still remains to be seen. But if all works as planned, the new program should increase homeownership and demonstrate to fledgling homeowners associations that they’ll receive a benefit in cooperating with FHA condo-buyers to help them qualify under the new
HR 3700 guidelines. If all goes as planned, the new FHA guidelines will help condo buyers and sellers navigate a pathway to increased homeownership and healthier communities.