The Federal Housing Administration is making it easier for first-time condo buyers, often with less than perfect credit, to get mortgages.
The new condominium approval rule, which goes into effect Oct. 15, will help reduce regulatory barriers. For example, the new rule will allow certain individual condominium units to be eligible for FHA mortgage insurance even if the condominium project is not FHA approved. (The condo unit needs to be in a completed project for approval.)
The change introduces a single-unit approval process making it easier for individual condominium units to be eligible for FHA-insured financing. It also extends the recertification requirement for approved condominium projects from two to three years, and allows more mixed-use projects to be eligible for FHA insurance.
The FHA’s backing makes the projects more marketable, said Brian Sullivan, spokesman for the U.S. Department of Housing and Urban Development. The rule change is expected to annually make 20,000 to 60,000 condo units eligible for the FHA-insured financing. The loan limit backed by the FHA for single-family mortgage insurance in Boulder County in 2019 is $626,750, up from $578,450 a year ago, Sullivan said. There are 2,722 active FHA-insured mortgages (not including reverse mortgages) in Boulder County, he said.
Though the change is not expected to create immediate ripples in the condo market in Boulder County, many Realtors and lenders see it as a welcome option for many buyers who have been on the sidelines.
“We are actively marketing that. We have been tracking that,” said Noel Bennett, branch manager, Premier Mortgage Group in Boulder.
The change works for people with lower credit scores and higher debt-to-income ratios, he said. For those with a FICO score of 680 and lower, the FHA’s backing becomes more attractive for lenders, he said.
The FHA provides mortgage insurance on loans made by FHA-approved lenders, protecting them from the risk of borrower default. Conventional loans, which require a higher score and a higher qualification threshold, are backed by private mortgage lenders. VA loans that help service members, veterans, and eligible surviving spouses become homeowners are backed by the U.S. Department of Veterans Affairs. VA, like FHA does not lend money, but insures qualified lenders.
Borrowers need to quality for loan programs, including those backed by the FHA, Bennett said. There won’t be a big wave of buyers, he said. First-time homer buyers are not buying in Boulder, he said. They are looking at Louisville, Erie, Superior, Longmont and in nearby counties, which offer cheaper housing options.
In Boulder, recently some condo projects have been developed as rental units, said Kurt Firnhaber, the city’s director of Housing and Human Services. Until recently Colorado’s construction defect laws that exposed developers to legal liability issues, inhibited condo projects, he said. (In 2017, a reform bill was passed by the state Legislature that required homeowners associations to obtain approval through a vote of unit owners before filing a construction defect action.)
Boulder’s share of middle class household has decreased 6% since 1989 with a corresponding increase in high income households, according to a 2016 document about the city’s Middle Income Housing Strategy. Boulder’s goal is to build or preserve 3,500 middle income homes by 2030, of which 1,000 will deed restricted making them permanently affordable.
The FHA’s rule could support that strategy, Firnhaber said.
In the last five years, 19 out of every 100 units created in Boulder has been permanently affordable, and an additional 17 units have been preserved as permanently affordable. That amounts to 440 units of affordable housing that have been created or preserved.
Part of 30th Street and Pearl Parkway is being developed as a mixed-use condo project, Firnhaber said. There will be 76 units in the first phase that will initially be used as rental units and will likely be sold as condos after the first seven years, he said. It’s a new strategy to help create owner-occupied condos.
Boulder City Council recently agreed to put a proposal to finance a down payment assistance plan for middle income households on the November ballot, he said, adding the goal to create deed-restricted affordable units is unique to Boulder.
For those looking to purchase a home outside the city limits of Boulder, the Boulder County Down Payment Assistance Program provides down payment and closing cost assistance to first-time home buyers. They can borrow up to 8.5% of the purchase price. The program is administered by Longmont.
In Longmont, the number of FHA-approved condo complexes has long paled in comparison to the overall number of complexes in town, said Josh Landers, a realtor with RE/MAX Traditions, Inc. in Longmont. Condos are a popular way for first-time buyers to enter the housing market, as they are often more affordable than single-family homes, he said. Longmont is much more affordable than Boulder, he said.
“With the FHA streamlining their approval process for condo complexes, FHA financing will become more widely available to a greater number of buyers, particularly first-time buyers. With affordability becoming more of an issue in Longmont’s housing market, the ability to purchase a lower priced condo with FHA financing will be a great option for buyers,” Landers said.
This also will benefit condo sellers, as they will now have a wider pool of potential buyers who can purchase their units with a lower down payment loan, he said.
The housing market in Longmont has cooled a bit as seen in price reductions and the longer time it’s taking to sell a single-family home or a condo, he said.
“It is still a healthy market,” he said.
The median sales price of attached dwellings in Longmont fell 2.9% from August 2018 to August 2019, from $345,000 to $335,000, according to a report by Land Title Guarantee Co.
Longmont-based F9 Productions Inc is building eight condominiums for sale on about a third of an acre at 825 Crisman Drive. It plans to market smaller condos for $327,000 and bigger ones for $395,000.
A listing of townhouses and condos for sale in Boulder County was down 6% in August, compared to the same month a year ago, and the number of sold listings decreased 12.3% from 155 in August 2018 to 136 in in August 2019, according to a report by the Colorado Association of Realtors.
Comparing data from January through August 2018 with the same period in 2019, the median sales price of townhouses and condo declined 1.9%, from $382,500 to $375,062 in the same time period this year.
The FHA rule change makes it easier for lenders to create a loan, said Rodney Carlson, a Realtor with ERA Tradewind Real Estate in Longmont.
“I don’t think it solves affordability problem,” he said, adding lenders have many low-cost products within the conventional loan category for eligible borrowers.
He said he believes the new rule might help the conversion of apartment complexes in Longmont into condos as long as a minimum of 50% of the units are occupied by owners, which is needed to comply with the FHA’s minimum ownership requirements.
The FHA also will approve a condominium project as long as the commercial/non-residential space within a project does not exceed 35% of the total floor area, according to the new rule.
The conversion process is governed by state law and ordinances governing housing, planning and zoning. A recent article in Colorado Lawyer, a publication of Colorado Bar Association, explains that conversion, though an attractive investment, can potentially have liabilities issues.
There are more than 600 apartments under construction or planned for the area near Main Street and First Avenue. If the developers opted to convert those unites to condos for ownership rather than rentals, they would not need to seek city approval. “The city would not be involved in a conversion to condominiums, unless the building is changing in size or the changes in ownership structure required modifications to the building that are covered by the building code. Such as electrical, plumbing, heating and cooling upgrades or changes that would require a building permit,” city spokesman Rigo Leal said via email.
Many of the changes in the FHA rule were championed by the National Association of Realtors to expand affordable homeownership opportunities across the country.
“We are thrilled that (U.S. Department of Housing and Urban Development) Secretary (Ben) Carson has taken this much-needed step to put the American Dream within reach for thousands of additional families,” John Smaby, association president said in a statement.
The change could boost demand from more moderate-income buyers, Lawrence Yun, chief economist at the National Association of Realtors, said in an Aug. 14 Wall Street Journal story. Though he warned “unless builders shift from building luxury apartments to condos, supply shortages at the lower end will persist.”
FHA insured multifamily developments in Boulder and Broomfield counties
Alvarado VillageCanyon PointeCatamaran CourtFoothills Group HomeGlen Willow ApartmentsGolden WestParkside Village TownhomesSan Juan Del CentroThe HubViolet Crossing Apartments
Eagle PlaceHelios Station
Aspen Meadows ApartmentsEastglen TownhomesFox Ridge ApartmentsGrandview Meadows ApartmentsImagine Housing Corp.Independent LivingLegacy ApartmentsLegacy West ApartmentsLodge At Hover CrossingLongmont Supportive HousingLongs Peak ResidenceMountain View PlazaParkside ApartmentsStonehedge Place ApartmentsTanglewood ApartmentsThe Hearthstone At Hover Crossing
Kestrel Mixed-Aged ProjectRegal Square
Broomfield SilvercrestImagineMaryel ManorTown Centre Senior ApartmentsVillage Square Apartments