Buying a condo is about to get more complicated, especially if you're thinking about getting an FHA mortgage.

The FHA is adopting new rules to govern mortgage loans it will allow for condo purchases, effective Nov. 1. With the rapidly growing popularity of FHA mortgages, which are expected to account for an estimated one-quarter of all home purchases this year, the new rules could put a crimp in the plans of many potential buyers

Among the key provisions: the FHA will not authorize a mortgage for a condominium purchase in a development where 30 percent of the units or more are already under FHA mortgages. In addition, at least 50 percent of the units must have been already been sold by the developer before any FHA mortgages will be approved and the entire development must be FHA-approved before any mortgages will be approved there.

What it means for potential condo buyers is that, closing a condo purchase after Nov. 1 could get a lot more difficult.

Spot approvals to be eliminated

One of the biggest changes will be the elimination of what are called spot approvals. Previously, if you wanted to buy a condo in a development that wasn't FHA-approved, all you had to do was obtain a waiver, which was easy to do. That wasn't a big issue when FHA mortgages were making up less than5 percent of the market, but with their increasing popularity, the agency is getting a lot stricter about its lending standards.

If you're looking for condo and planning to use an FHA mortgage, you may want to focus your search on existing, rather than newly built, condominiums. Because, until recently, FHA loans made up such a small percentage of the market, it's unlikely that an established community will have a large proportion of units financed by FHA loans. A newer community, particularly one that has only been filling its units within the last year or so, may very likely be running up against the 30 percent limit.

You should also make sure from the outset that any units you are considering are in FHA-approved developments. This is a good idea even if you're not planning on using an FHA loan to buy the property, because lenders may be reluctant to allow a mortgage on a non-FHA property these days, due to potential resale problems - a condo that isn't FHA-eligible these days automatically eliminates 25 percent of potential buyers.

Many lenders already applying new rules

You could go ahead and buy and close on a non-FHA condo before the Nov. 1 deadline, but many lenders are already structuring their policies to reflect the new rules. In addition, having a non-FHA approved condo could make it difficult for you to sell a few years down the road, assuming FHA mortgages remain popular, even if not as highly as today. It's worth noting that FHA mortgages, though making up only 3-5 percent of the market for much of this decade, were far more common in earlier years, making up 10-13 percent of all sales through the 1990s.

FHA loans have become increasingly popular as credit markets have tightened, due to their relaxed credit requirements and the fact they will allow down payments of as little as 3.5 percent. As long as the economy remains weak, they're likely to represent a major source of mortgage funding, particularly for persons seeking modestly priced housing, such as many condominiums represent. For persons thinking of buying a condo right now, focusing on FHA-approved developments is a smart move, particularly in the current market.

Published on October 5, 2009