FHA loans provide qualified buyers an opportunity to purchase units with loans that they would not otherwise qualify for. In particular, FHA loans allow for smaller down payments, often as low as 3% of the purchase price. Next month, the rules behind these Federal loans will be changed substantially, making many condo projects and buyers ineligible for the first time.
When it comes to downtown Austin, FHA loans are the exception and not the rule. Many new condo developments require deposits and down payments beyond the FHA minimums, diminishing the advantages of an FHA loan. In addition, many units are priced beyond the FHA loan maximum eliminating these loans as a viable financing option. Finally, since the process has always been complex and painful, few projects go through the hassle to be certified.
Starting October 1, new FHA rules will be introduced that will make these loans even more difficult for buyers to obtain. Here are the new requirements:
– Projects not deemed to be used primarily as residential real estate will be ineligible.
– Because of noise worries, FHA insurance will be unavailable when properties are within 1,000 feet of a highway, freeway, or heavily traveled road; 3,000 feet of a railroad; one mile of an airport; or five miles of a military airfield. Projects must take action to avoid or mitigate such conditions before completing the loan review process.
– There will be no more FHA loans if the “property has an unobstructed view, or is located within 2,000 feet, of any facility handling or storing explosive or fire-prone materials.”
– FHA loans will bot be available if the property is located within 3,000 feet of a dump, landfill, or super-fund site.
– Not more than 25 percent of the property’s total floor area can be used for commercial purposes.
– No more than 10 percent of the units may be owned by one investor. This will apply to developers/builders that subsequently rent vacant and unsold units. For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete; and only one unit can be conveyed to non-owner occupants.
– No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
– For new developments, at least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. Valid presales include an executed sales agreement and evidence that a lender is willing to make the loan.
– At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies).
– Projects in designated wetland and flood zones will not qualify for FHA insurance.
– All current condominium project approvals will be invalid (with the exception of projects approved on or after October 1, 2008) and projects must be re-approved under the new options available. Going forward, all projects will require recertification every two years
It’s not clear yet how these new rules will effect the downtown Austin condo market. That said, the fewer available funding options, the more difficult it will be for future condo sales to be completed.