New FHA rules will help homeowners purchase a condo

As Las Vegas homebuyers are likely to notice, often the most affordable homes on the market aren’t single-family homes — they are condo units. Complete with cheaper price points and typically with more community amenities, a change in federal law also could make buying a unit much easier.

Congress in July directed Housing and Urban Development officials to adjust its strict Federal Housing Administration qualification guidelines for condo developments or accept Congress’ proposed changes by Oct. 27.

FHA loans are extended to buyers depending on a variety of qualifying factors, and are one of the most-used loans for first-time homebuyers. One of the biggest selling points for FHA loans is the low down payment required — just 3.5 percent, compared with the 20 percent necessary through conventional financing.

FHA loans are backed by the federal government, which allows banks to lend to a broader segment of buyers who might otherwise be seen as risky investments. Because of this, FHA loans often have stricter requirements and more thorough property inspections, but also make affordable homeownership a reality for buyers who otherwise couldn’t qualify.

“This got widespread bipartisan support because everyone wanted to be seen as helping out Main Street instead of Wall Street as the election is coming up,” said Uri Vaknin, a partner at KRE Capital LLC, whose company, in partnership with Dune Real Estate Partners, owns DK Las Vegas The Ogden, One Las Vegas and Spanish Palms.

“But it’s a good thing; FHA loan rates are typically lower than conventional loans.”

The two biggest points of contention for Congress? The condo owner-occupancy rate and the burdensome process for a complex to qualify for FHA lending.

An entire complex must be precertified for FHA lending before a homebuyer can purchase a unit with an FHA loan.

Currently, 50 percent of a project must be occupied by the owners of the units (not rental units, and not vacant units). Congress is moving to reduce the owner-occupancy rate to 35 percent, if HUD doesn’t propose a different rule.

“I think Congress’ intent was to tell FHA to justify a new owner occupancy rate; otherwise it becomes 35 percent,” said Brian Sullivan, HUD spokesperson.

Why does FHA certification matter?

While the FHA qualification process isn’t easy for condo projects, and as Vaknin explained, can require a strong homeowners association if the builder has already moved on, it can be well worth the hassle for the residents.

Resale value improves because more buyers can qualify, safety standards are set for the complex because it must pass inspection and the HOA is more healthy.

Vaknin explained that the FHA rules require 10 percent of HOA revenue be kept in capital reserves because the federal government doesn’t want to back a loan for a unit within a complex that isn’t stable.

“Of course, the value of any unit is incumbent upon where the unit is,” Sullivan said. “But it’s true enough that if your condo development is FHA-approved then every unit within that development is approved for FHA financing, so the population of buyers is larger. So as an extension of that, it becomes more competitive and price goes up.”

Why does owner occupancy rate matter so much?

Not only does the owner-occupancy rate limit FHA buyers to condo complexes where most residents aren’t renters, but it also creates a presale requirement.

“The presale requirement of 50 percent meant that a project couldn’t qualify for FHA lending until it sold half the units,” Vaknin said. “That completely depressed the market. FHA buyers were shut out of the condo market.”

So what happens Oct. 27?

If HUD doesn’t propose an alternate rule, the default that Congress set in July takes effect at the end of the 90-day period. If HUD does propose a new rule by then, nothing will happen Oct. 27.

Sullivan said a HUD rule change is undergoing review and the agency hopes to propose it before the deadline. If the rule is proposed, it will undergo a public comment period and isn’t likely to take effect until sometime in 2017.

And, just how hard is it for a complex to get certified?

“Complicated enough that Congress called on us to streamline the process,” Sullivan said.