Many condominium developments around the country have lost their eligibility for Federal Housing Administration (FHA) financing, which could make it much harder to sell units in those projects. This is due to several changes in rules that have been released in response to the housing crisis.

The US Department of Housing and Urban Development had previously required that completed condo projects only needed to apply for approval one time and the certification would remain in effect for the life of the project. But in the wake of the housing crisis, HUD began requiring renewals on all condo projects every two years.

In order to obtain approval, no more than 15 percent of units in a development can be delinquent 30 days or more on their association fees. In addition, at least half of the units in a development need to be owner-occupied. Another rule states that the condo association can not be in litigation in order to be approved for FHA financing programs.

The effects of the condo law changes

The tighter rules were implemented in 2009 and are intended to protect the FHA and the taxpayers who fund FHA programs from steep losses on condo mortgages in the future. Many condo developments saw prices drop sharply in the housing downturn.

These rules apply only to condominiums and not to single family homes or townhomes where the owners have title to the land under their units.

Sellers in condo projects that don’t have FHA approval will be limited to finding buyers who are willing and able to pay cash and buyers who can qualify for conventional, non-FHA insured mortgages. Cash buyers will typically be investors who intend to convert the units they buy to rentals, which makes it even harder for future buyers to obtain FHA financing as the percentage of rental units increases.

Reverse mortgages can be used for any purpose, including a condo purchase. The reverse mortgage could provide the funds needed for an all-cash purchase or the proceeds of the reverse mortgage could serve as the down payment to obtain traditional financing. After purchase, the condo could then become a vacation property for a retiree or a source of income.

Home ownership rates are down as a result of the housing crisis and rental rates are rising in almost every market.

Many condo sellers will be trying to find a buyer at almost any price, offering bargains to investors. Many tenants will be looking for housing. The combination offers potential rewards to those looking at innovative strategies to boost their retirement income and the reverse mortgage could offer an innovative financing solution to make the investment possible.

Leo is an avid patroller of the mortgage, reverse mortgage, and retirement industry! Leo enjoys keeping up to date and reporting on important issues that are in the news. He also likes educating people on how both the traditional and reverse mortgage industry works

Leo Franklin

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