The Crisis Continues- Impact On New Condominiums

Developers are finding it increasingly difficult to sell their condominiums. Condos represent the weakest part of the market. New condominium sales in April were down 12.5% over the previous year. More frequently, owners are seeking government-backed loans (like FHA) to qualify for lower down payments.

To be eligible for FHA loans the development or building must meet specific standards. These standards are often more strict than local requirements. For example, there must be at least a 10 year structural warranty from the developer and a reserve fund must be established. A condominium board must waive the right to refuse potential buyers. So condominiums with “right of first refusal” are finding it difficult for owners to qualify for government-backed loans. Where there are more than 30 units, no more than 10 percent can have FHA financing, and where less than 30 units, no more than 20 percent can have FHA financing. For a mortgage to be considered for FHA backing, at least 51 percent of the units in the condominium must be sold.

Fannie Mae and Freddie Mac are government controlled mortgage companies, and tend to have tighter restrictions. For example, Fannie Mae will not guarantee a mortgage on a condo where fewer than 70 percent of units have been sold, it will not purchase a mortgage if 15 percent or more of the owners are delinquent on assessments, nor will it if one owner owns more than 10 percent of the units. Freddie Mac has similar policies in place.

Both institutions have increased fees on mortgages for condominiums Buyers with less than 25 percent down payments must pay increased closing cost fees, up to .75 percent of the loan, regardless of credit score. This fee was dropped in August for detached condominiums.

There had been political pressure to changed these tightened requirements so as not to detract buyers from new construction. But it is safe to say that more changes will be coming. The projection is that things will get worse before they are better due to the increased supply of units on the market. One startling statistic is that as of the end of April 2009 the United States had enough condominium units available to absorb the following 15 months of demand, according to the National Association of Realtors.

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