FHA Changes that will effect YOU!
This week the enacted FHA condo changes took effect making the “concentration limit” on condo communities enforceable at 30% concentration. Most of you are probably asking yourself what in the world is he talking about, well here it goes.
Background: During the decade of 2000-2010 there were programs that were allowed by FHA which allowed sellers to pay the down payment of a buyer using FHA financing by using a “charity” program. Due to this loophole some builders were taking most of their buyers through FHA even if they were putting down a significant amount due to being able to give them up to 6% of the purchase price towards their purchase. This was a way to ‘differentiate’ themselves from the other builders, especially in the first time homebuyer price range. This loophole was then closed around the same time that conventional lenders began to phase out the zero down payment programs and this made FHA even more prominent for first time homebuyers looking for low down payments. So from 2007 – 2010 many home buyers in the price range of condos use FHA financing for the low down payments. Then in 2010 FHA made some new rules for condos, making it much more difficult to get financing from them. Many of these rules were postponed due to the lack of infrastructure to support those changes. One (and in my opinion the most damaging) was the 30% concentration rule.
Effects: This rule effects the the sellers (and buyers) of condos where more than 30% of the condos in the community are financed with FHA financing. For sellers (former buyers) of condos in these communities in New Albany, Gahanna, Worthington, Westerville, Dublin and other areas of Columbus this rule has all but dried up the market on buyers in the sub $150,000 price range. Many of these communities have over 50% FHA concentration in their community and if the rule holds true, no buyer can purchase without paying cash or using conventional financing. The biggest hurdle with conventional finacing on a condo is the down payment, most are a minimum of 10% down and in the sub $150,000 price range many buyers just simply do not have the cash to put a down payment down not to mention the credit score requirements for these loans.
Editiorial: The problem I have with this idea is really simple. The leadership at HUD (Housing and Urban Development) who oversees FHA likely decided to make this rule to keep their exposure to foreclosures low in condo communities that have experienced rapid price decline and keep them from having an increase in foreclosures. The ironic part of this theory is that by making this a retroactive rule they are actually increasing the chances of that happening because a large percentage of this price range do not have the ability to get any other type of financing. The increased inventory and decreased number of buyers will force prices down and eventually force people not able to sell at the low prices to short sell or foreclose at an even lower amount than the sellers able to sell outright. The most unfortunate thing is that most of the buyers of these condo units had no idea something like this would happen prior to purchasing and are now stuck with very few options other than very large losses, short sale or foreclosure.
***This could all be curbed with more reasonable conventional financing of condos and if that does happen sooner rather than later this article could become a non-starter. If no healthy condo financing alternative becomes apparent in the near future many of these communities are going to suffer greatly and FHA will experience massive losses due to this decision that does not appear to be well thought out in any way, shape or form.