I've received 4 calls this week from home buyers looking to buy condos in Chicago and the Chicago suburbs. With more condos on the market than at any time over the last several years this is a great time to buy. This means there is more of a selection to choose from, and the competition is bringing condo prices down. This is a great time to buy a new condo, but changes in the mortgage market have made financing condominiums harder than it used to be. Mortgage guidelines have gotten much tougher and mortgage insurance companies are even tougher. Fannie Mae and Freddie Mac have junked their declining market policy, but the mortgage insurance companies have kept the policies intact. What this means is that in declining markets the mortgage insurance companies require an extra 5% down payment in order to take on the loan, so if you were going to put down 5%, you would now need to have 10% for a down payment. Chicago and the entire Chicago area are now listed as declining real estate markets. The net result is that if you are going to buy condo anywhere in the Chicago area, and you are going for conventional financing, you may need a 10% down payment.
These new requirements are going to make it harder to finance Chicago area condos, but there is one way you can still buy with a minimal and in some cases no down payment. FHA financing allows a 3% down payment and this money can come from not only your own funds, but a gift from a relative or a grant from a down payment assistance program (at least for now). There's only one catch. When you buy a condo with FHA financing, the condo needs to be approved by FHA. There are a lot of condominium complexes and buildings that are FHA approved, but most of these are older properties. Many of the condo units have been built or converted to condo in the last 5 years, and during this time FHA was looked at as a dusty old program with loan limits too low to even worry about. So the developers never applied for the FHA approval. But things have changed since then. The FHA loan limit in the Chicago metropolitan area has been raised to $410,000, and FHA now is able to approve more buyers than any other program. If you are looking for a condo the first thing you should do is to see if the property you are looking for is already FHA approved. There is a HUD web site where you can search for properties by address and zip code, to see what is already approved. If you have a question or want to see what FHA condos are available in your town, contact me and I'll be glad to run the search. IF you are interested in a property that isn't on the list, there is another option. FHA offers a way to approve condos units one at a time with a spot loan.
FHA spot loans are designed to make FHA financing available to home buyers in successfully run condo buildings which have not gone through the approval process. From the FHA guidelines, the following requirements must be met to approve a spot loan:
- The condominium project must be complete, including all common areas and facilities.
- Control of the common areas must have been turned over to the homeowners
- association for at least one year.
- The owners association must provide evidence that the project has the appropriate
- hazard, liability and flood insurance.
- Individual units in the project must be owned fee simple. The project's legal documents must provide for undivided ownership of common areas by unit owners.
- The project's documents should not place any legal restrictions on conveyance. Any provisions that seek to limit the free transferability of title is unacceptable. Such restrictions include rights of first refusal and restrictive covenants.
- At least 90% of the units in the project must have been sold.
- At least 51% of the units in the project must be owner occupied.
- No single entity may own more than 10% of the units in a project. The 10% restriction does not apply when the ownership of less than three units would disqualify an otherwise eligible project. The Department recognized that the 10% cap on the number of units that may secure FHA insured mortgages in a given project can place a small regime at a disadvantage, since only a few units will invoke the limit. Accordingly, a two tiered system was established. For condominium projects having more than 30 units, no more than 10% of the units may have FHA insured loans at any given time. Condominium projects consisting of 30 units or less, can have up to 20% of the units encumbered by FHA insured mortgages under the spot loan rule.
It's up to the mortgage lender (that would be me) to gather the correct documentation to show that the condo project meets all the eligibility criteria. Once we have all the documentation this would be submitted to the underwriter along with the rest of the file. Putting together an FHA spot approval takes a little more time and effort, but it allows home buyers to buy a condo they couldn't buy with a conventional loan. In this market it may be one of the best tools available, for condo buyers and sellers alike.