FHA loans are proving to be the bright spot of the housing industry, enabling many first-time buyers to enter the market at a time when tighter lending requirements otherwise would not allow them.
That is, unless they're in the market for a condominium.
Unlike Federal Home Administration-insured mortgages for single-family homes, FHA loans for condos are more complicated, and here's the biggest difference: You can't just buy any condo you want. Either the unit itself or the entire building has to be FHA approved.
Such wrinkles have slowed and made condo shopping more difficult and sent property owners scrambling for FHA approvals.
The rules are being dusted off after more than a decade of non-use as lenders, borrowers and developers flock to FHA loans, which require down payments of as little as 3 percent of the purchase price.
"They're not new rules, just no one cared about them before," said Michelle Collins, senior vice president of mortgage lending at ShoreBank. "FHA is the old game that is the new game in town. This is a brand-new problem. I think this is going to be a huge problem in the condo market specifically."
Lenders and real estate agents say transactions involving FHA-insured mortgages appear to have tripled, based on anecdotal evidence. For the month of June, FHA-insured new and refinanced loans totaled 4,066 in the 19 Northern Illinois counties served by the Chicago office of the federal Department of Housing and Urban Development. That's up from June 2007's 1,347 loan total. Condo numbers weren't broken out.
FHA rules wreaking the most havoc locally are a requirement that a building must have four or more units. That means buyers of a condo in a three-flat need not apply. There's also a rule that a building's condo association cannot have a "right of first refusal" as part of its declarations of covenants and restrictions. Frequently in place but seldom used, right of first refusal enables an association to turn down a prospective buyer and then buy a unit from a seller.
HUD won't allow the term because it might limit the agency's ability to resell a condo in its possession, and it could be perceived as discriminatory.
Some 15 years ago, the FHA wasn't such a stickler on this rule. It would accept a condo association letter saying it would waive the right of first refusal, said Judith Heaney, supervisory operations officer of HUD's Chicago office. Now declarations have to be formally changed, an expense not all condo associations may be willing to make.
"We've been telling the Realtors to go talk with associations about removing it from the [declarations]," said Steve Molitor, vice president of PHH Home Loans in Evanston.
Confusion for buyers
Chicago Ridge resident Jennifer Yaeger has been browsing for a condominium in the south suburbs for more than a year with plans to seek an FHA loan. But it wasn't until she sat down with a lender and was told the rules, and then went online, that she learned none of the buildings she had been eyeing qualified.
"I honestly didn't think there was anything different in buying a condo with an FHA loan than a single-family home," said Yaeger, 33. "The process of buying a home, it's so strenuous. Finding out that I had just another thing that could work against me and narrow my choices even further was intimidating."
Using HUD's online search engine two weeks ago, she compiled a list of 70 condo buildings that qualified for FHA loans and e-mailed it to her real estate agent, although she didn't know which, if any, of the buildings have units available and were in her price range and to her liking.
"A buyer will look at stuff on the Web, see all this great selection and not necessarily understand that this isn't all available to them," said Jane McClelland, an owner of Re/Max in the Village Realtors in Oak Park. "When we take listings, we ask [sellers] for all their declarations, but most of the time they look back at us with blank stares."
For the past 10 years, building development and management companies rarely considered getting properties FHA approved because they didn't need the extra paperwork when buyers lined up outside their doors and other low-cost financing options were available.
The sluggish market, along with the FHA's recently raised loan limit ceiling of $410,000, is causing some sellers to reconsider.
But it's not an overnight process. Approvals for Chicago-area FHA-insured mortgages, processed in Atlanta, currently take eight to 10 weeks, twice the normal processing time, Heaney said.
The fact that a property is FHA approved is even popping up in marketing material.
When developer Mike Fox began converting an Oak Park apartment building into condos, he had little intention of seeking FHA approval for the building. But now that the development is a year old and half of the units are sold, he got notice last week that his Lions Gate is FHA-qualified. He plans to include the designation in his marketing materials and hopes it will end a recent spate of canceled deals.
"It will help me with that unpredictability on the lender side of life," he said.
via Chicago Tribune
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