The FHA is changing the lending rules for Condos

Watch Out, the FHA is changing the lending rules for Condos!  Because of this, many developers  are scrapping plans for any new projects.  As of this last Monday, the FHA (Federal Housing Administration) started limiting how many of you can get your loans insured when buying a condo.  The new rules have also put restrictions on buildings with poor finances, too many deliquent owners, and a high number of rentals.  The intent of the tighter lending standards is to protect the financial health of the FHA.  Right now, about 18 percent of loans insured by the FHA are deliquent or in foreclosure, and this puts them below their allowable minimum.

This is a critical issue with those of you interested in purchasing condos, as the FHA has been a key source of financing in the past.  The reason the FHA has been so key to condo buyers is because you only need a 3.5 percent down payment for this type of financing.

One of the new rules is that the FHA is only going to allow 50 percent of a condo building's units to use FHA backed loans, and that rule will drop to 30 percent in 2011.  Another rule is that at least 30 percent of units in a new building must be pre-sold before the FHA will insure any loans.  That number will increase to 50 percent by 2011.  These changes will complicate the ability for you to make your condo purchase moving forward.

The government feels these rules are necessary to ensure that you are purchasing units in viable buildings, as well as help ensure that defaults on condo loans don't rise too high.  The problem is, many condo buildings may have difficulty selling their units to perfectly good buyers because of these rules, and that could extend vacancies and lower the value of the complex.  Let's just hope these new FHA lending rules for condos don't backfire on all of us.