Today's Down Payment Requirements & The FHA Condo Dilemma

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Condo Financing

First time homebuyers are finding themselves in a down payment quandry while condo sellers are wondering where the buyers went. Of all the changes in the mortgage markets over the past 3 years, first time homebuyers are feeling the impact of the new down payment requirements the most.

Listen up condo sellers! Apart from informing buyers of the current down payment requirements this blog post will also help educate condo sellers on how they can combat this financing issue, attract more buyers and get a higher sales price. Sound good? Well read on…

Up until about a year ago lenders were dishing out loans to anyone who could scrape together about five hundred dollars and convince the bank that they will pay them back. Okay so that didn’t go so well (understatement). The easy access to money helped push home values to new heights.

In general there are two type of mortgages out there. Conventional and FHA. Conventional mortgages are not government backed while FHA mortgages are. Historically conventional loans have been easier to qualify for, had lower down payment requirments and less paperwork too. If I was to guess, (disclaimer: I’m really guessing) of all the loans created in the Twin Cities from 2002 to 2007, 95% of them would have been conventional mortgages. With condominium buildings a higher power must bless the building before lenders will write mortgages for buyers (there are some exceptions but I don’t want to digress). The blessing is usually the result of the diligent work of the developer at the time the building is built. If you are a developer and are seeking buyers obtaining conventional mortgages you will need Fannie Mae to review and approve your building. If you are a developer and are looking for buyers obtaining FHA loans you will need HUD to review and approve your building. During the recent new construction boom, condo developers saw little to no reason in putting forth the time and expense in  going through the FHA approval process. If only 5% (cough) of the buyers were seeking FHA loans, and could also probably qualify for conventional, why bother… right?

Well fast forward to 2009! The developers are long gone… and something else is back… that’s right, FHA mortgages. And in the meantime a few things have changed. Fannie Mae and Freddie Mac have tightened their belts several notches and the conventional financing isn’t too attractive to first time homebuyers anymore.

  • In general, for a first time homebuyer buying into a non-FHA approved condominium building they will need to have at least a 10% down payment (of course there is always the exception to the rule but this is currently the market standard). And as of this past month, many lenders are even taking it a notch further and requiring a minimum of 15% down. The buyer is required to come to closing with at least 5% of their own hard earned money and the remainder of the down payment can come as a gift. 
  • In general, for a first time homebuyer buying into an FHA approved building, they are only required to have a 3.5% down payment and of which all of it can come as a gift from a family member if desired. Furthermore, the $8000 tax credit looks like it will soon be available for buyers at the closing table to use as their down payment.

Whatever it is you are selling, the more people that are ready and willing to buy your product the higher the price you will likely obtain. Appealing to the masses is key, and is why we settle for beige carpet and paint earth tones on the walls. We don’t want to alienate or push anyone away. By not being an FHA approved condominium, associations are drastically limiting the number of potential buyers that can buy into their building. For the same condo that you may have bought into with $500 cash four years ago, a new buyer - your one way ticket out,  could be required to bring upwards of $35,000 for a down payment to closing. While many buyers do have a substantial down payment ready to go, many more first time homebuyers have worked hard to save up their 3.5% and are fired up and hungry to become a homeowner. Unfortunately for those buyers who only have the means for a 3.5% down payment they will be limited to selecting from only those buildings in which HUD has blessed with their FHA seal of approval.

Many associations do not even know if they are FHA approved or realize the significance in doing so. The time is now to seek answers and make your condo attractive to the down payment haves and the down payment have-nots. The active FHA condo buyer’s options are severely limited and by obtaining an FHA approval for your building you are truly setting your building apart from the competition and tapping into a huge (and growing) pool of buyers.

Contact me at 612-616-3058 if you’d like to find out if your building is FHA approved or not. If your building is not FHA approved I’d be glad to walk you through the process of getting approved. The cost and effort put forth in doing so is minimal in comparison to the benefits.

Date: Monday, May, 18th 2009 @ 07:10:36 PM
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This blog entry currently has 2 comments posted.

Bobbie Keegan

I currently have my condo in Edina for sale - our building is NOT FHA approved and I need to convince the Board and management that we need to act on this . . . How can I find out a list of condo associations in Edina tht ARE approved?

Andy Asbury

Hi Bobbie, I applaud your efforts and I hope your building will decide to take steps towards getting FHA approved. I would be open to attending one of your meetings to communicate to the board what is currently going on in the market and why getting FHA approved is a good idea. Meanwhile, to answer your question about identifying which buildings are FHA approved and which are not you can look them up on HUD's web site here: https://entp.hud.gov/idapp/html/condlook.cfm

Hope this is helpful!

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