Now that most zero down loan options have been removed from the market, many condo buyers are turning to FHA loans as the next best thing.
At this time, FHA loans require a minimum down payment of 3% and allow the seller to pay closing costs, which can range from approximately 3 to 6%.
One of the issues that can arise from using an FHA loan to purchase a condo is the restriction that FHA puts on which complexes the condo can be located in.
The department of Housing and Urban Development (HUD) maintains an "out-dated" list of approved condo complexes where an FHA loan can be used.
Many agents and buyers are unaware of this and can end up wasting time making offers on condos they cannot finance and can also face the disappointment of having to cancel a sale after getting an offer accepted when learning that the complex is not FHA approved.
To avoid wasting time or facing disappointment, it is a good idea to ask the condo association to complete an FHA Approved Condo List Questionnaire for the area you are interested in before looking at condos for sale.
The approval of a complex is based on numerous factors, including the owner-to-renter ratio, the funding and legal status of the HOA, and whether or not the complex has applied to be approved.
Lenders say informally that the use of FHA loans to buy houses has tripled, but certain restrictions are prohibiting FHA condo buyers away.
Also, approvals for condos take eight to 10 weeks, twice the processing time for single-family dwellings.
Let's just say that a lot of lenders aren't able or aren't willing to do loans on condos," said Mark Goldman, mortgage broker and real estate professor at San Diego State University.
Though every bank is different, most want a list of assurances about buyers and the building they want to live in: that a certain number of the units are lived in by their owners (usually 50 percent), that the developers of new buildings aren't going to turn around and rent out the units they can't sell, that the homeowners association isn't suing the builder for any reason.
That helps a bank minimize its risk. If a building has a bunch of empty condos left, the potential exists for lower prices or leased out units. Meanwhile, a lender who made a mortgage on one of the first units could be out money if the buyer ends up upside-down in the unit and walks away.
Before, loan programs were available that didn't require those guarantees. Now, many banks are going back to those standards. And that question is increasingly having as much to do with the health of a neighborhood or a building as with the perceived ability of the borrower to repay the loan.
"You do sit on pins and needles waiting to see if the lender's going to approve your stuff," said Pete Thistle, a real estate agent with 92101 Urban Living who used to be a loan officer in the days of easier-to-get mortgages in downtown. "The guidelines have gotten much stricter. Beyond just getting approved by a bank with good income and good assets, good credit, you've also got to look at the condo building."
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