In a dramatic temporary reversal of policy, the Federal Housing Administration is giving condo buyers a much-needed break.
Last week, the FHA, the federal agency that insures low-down-payment home loans for private lenders, said it was relaxing its building underwriting guidelines as a way of helping the struggling sector ride out the downturn. The move could help boost sales in condos by making more FHA mortgages available to borrowers.
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. This month, the rules behind these Federal loans were supposed to change 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.
The new rules – which are temporary – come after more than a year of more stringent standards from lenders, who, after suffering major losses on condos, began vetting and disqualifying condominium projects for purchase loans, regardless of whether home buyers qualified.
The temporary rules are effective for most of the coming year and will help the marketplace transition into a new set of tougher guidelines that bring FHA into closer alignment with the project underwriting practices of Fannie Mae.
Earlier this year, Fannie implemented a slew of new regulations governing condo projects that some claim have strangled the market by stigmatizing condo loans in tough markets such as Florida.
Similar to Fannie regulations, the FHA is also now singling out those markets for special attention by approving projects itself, rather than lenders. Burns said lenders and investors were reluctant and even “scared” to lend money, prompting the agency to step in as a way of calming nerves.