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Want to buy a condo? Financing just got a little easier

Sarah Paynter

It is about to get a little easier to buy a condominium in the U.S.

The Federal Housing Administration, which insures mortgages made by private lenders and banks, will ease condo financing regulations to open up homeownership for more first-time buyers, effective October 15. The move will help qualified homebuyers obtain low interest rate loans and allow smaller down payments for a home purchase.

Under the new rule, individual condo unit owners can apply for federal mortgage insurance, even if the condo association or developer has not applied for funding. Since the agency stopped allowing single-unit approvals in 2008 due to the Great Recession, if a condo development’s leadership did not want to go through the arduous FHA approval process, individual condo owners could not receive FHA funding, according to Orest Tomaselli, chief executive officer of National Condo Advisors, LLC.

“These changes open the door tremendously for first-time homebuyers, with enhancements that will make funding more available,” said David Barnhart, vice president of condominium management at Chicago-based property manager The Habitat Company. The legislation will also help condo owners who want to refinance or apply for a reverse mortgage by giving them more options.

Currently, there are about 15,000 developments in the U.S. approved to participate in the FHA’s mortgage insurance programs, according to the U.S. Housing and Urban Development. The change would open up an additional 20,000 to 60,000 condo units to federal funding, according to HUD. In some markets, like New York City, it would open up 5,000 to 10,000 units, Barnhart said.

Hunters Run Condos in Denver, Colorado, (Photo By Hyoung Chang/The Denver Post via Getty Images)

“FHA responds to what the market is telling us,” said Brian Montgomery, Assistant Secretary for Housing and Federal Housing Commissioner for HUD, in a press statement. “This new rule allows FHA to meet its core mission to support eligible borrowers who are ready for homeownership and are most likely to enter the market with the purchase of a condominium.”

Condo associations will likely find the application process less burdensome, too. Commercial space used to render condo developments ineligible for FHA-backing. But that ban has been lifted, allowing developments, with up to 35% of the development’s floor area, to be eligible.

Prior to the new rule, FHA-backed condominiums had to recertify every two years. That re-certification has been extended to three years and the process is simpler. However, only a limited number of individual condos can receive financing — only 10% of units, or no more than two units in a development with less than 10 units. That could be because the FHA doesn’t want the new legislation to be a workaround for an entire condo development application, according to Esther Phillips, senior vice president of Illinois-based Key Mortgage Services.

Despite the change, entire condo developments must meet certain requirements for a single unit to be approved, and the FHA has not issued specific guidelines on oversight for the process.

“If a lender does lend with a single-unit approval and the building is not compliant, they [the lender] may be required to re-purchase the loan,” Tomaselli said.

A very limited effect on home sales

While the change isn’t expected to boost overall U.S. home sales because the condo market does not represent a large portion of the home-buying market (single-family homes do), it should provide a little lift, especially with the help of low mortgage rates.

From 2016 to 2018, existing condo sales declined 2.2%, while median existing condo prices increased 9.2%, according to the National Association of Realtor.

Additionally, the change comes at a time when low-priced housing inventory under $200,000 has dropped, and inventory of homes under $750,000 have stalled, making the market very competitive for first-time homebuyers. Optimism about home purchases has also dropped in September, after an all-time high in August.

“There is very limited financing available for lower down payment attached unit housing like this,” said Phillips. “With today’s buyers, that’s one of the most limiting factors.”

Sarah Paynter is a reporter at Yahoo Finance. Follow her on Twitter @sarahapaynter

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