What's Up with Condos Lately?

There are many guidelines in the condominium lending world and investors need to know how these changes will affect them.  Why?  Well, the default rate on condominiums has increased substantially as units have faced foreclosure and associations have gone bankrupt.  Now keep in mind, I'm talking about condominium OWNERSHIP here, not necessarily the structure.  Condominium is a form of property ownership and a condo development can be the traditional apartment style structure, single family homes, townhomes or another variety of build-out.

The new guidelines apply to all loans sold on the secondary mortgage market and insured by Fannie Mae or Freddie Mac which amounts to approximately 40% of all mortgages in the U.S.

First, new guidelines were issued at the beginning of 2009: 

• For new construction and newly converted condo developments, 70% of the units must be pre-sold (closed or under contract). This is being increased from 51%.
• No more than 15% of a condo project units can be more than 30 days delinquent on HOA dues. This is an existing guideline that is now being applied to new condo projects. The calculation was also changed from being 15% of HOA fee payments to 15% of total units.
• Fidelity insurance will be required for condos with 20 or more units, ensuring that homeowner association funds are protected. Presently, this requirement applies to new projects and is now being extended to include established condos.
• A requirement that borrowers must now obtain a condo-owners insurance policy unless the master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condo-owners policy, known as an HO-6 policy, covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider.
• No more than 10% of a project can be owned by a single entity.
• No more than 20% of a project can consist of non-residential space.
• The homeowners association must have at least 10% of its budgeted income designated for replacement reserves and adequate funds budgeted for the insurance deductible.

Now, as described by RealtyTrac, here are the latest restrictions:

• All projects not deemed to be used primarily as residential real estate are out. 
• Because of noise worries, FHA insurance will be unavailable when properties are within 1,000 feet of a highway, freeway, or heavily traveled road; 3,000 feet of a railroad; one mile of an airport; or five miles of a military airfield. The FHA says that lenders “must avoid or mitigate” such conditions before completing their loan review process, but how does one avoid or mitigate an air force base? How much mitigation is enough mitigation? The obvious result is that with an abundance of caution lenders will be unable to finance properties with potential noise hazards. 
• There will be no more FHA loans if the “property has an unobstructed view, or is located within 2,000 feet, of any facility handling or storing explosive or fire-prone materials.”
• Also, FHA loans are out if the property is located within 3,000 feet of a dump, landfill, or super-fund site.
• Not more than 25 percent of the property’s total floor area can be used for commercial purposes.
• Projects in designated wetland and flood zones will not qualify for FHA insurance. 

Related Post
Before Buying Into a HOA or Condo Association...
So, You Want to Buy a HUD Home...

Related Trainings
Learn Real Estate Investing 
Work With a Real Estate Coach
Get Started Investing in Real Estate