This past October, the Federal Housing Administration (FHA) enacted long-expected changes to the regulations governing condominium purchases. While these amendments will hopefully ease more prospective homebuyers’ affordability woes, the wider commercial real estate industry will feel the effects as well.
Before these new regulations came into effect, FHA financing of condos was only available in properties pre-approved by the FHA (with mandated recertification every two years)—which in reality accounted for only a sliver of potential buildings. Prospective owners with FHA backing were at the mercy of the building’s LLC or condo association to seek out that certification.
Now, a potential owner looking at an individual condo residence can seek FHA approval. This presumes that the target condo is in a building with more than 10 units, of which fewer than 10 percent are FHA insured at the time of application. In buildings with nine units or fewer, no more than two units can be backed by the FHA.
“When we work with buyers who wanted to use an FHA loan, we would often run into condo associations that were approved at one time but didn’t renew it,” said Ben Creamer, co-founder and managing broker of Downtown Realty Company. “With the buyer often looking to move quickly, there isn’t enough time for the association to go through the approval process.”
This single-unit approval process gives a clear advantage to prospective condo owners. However, these regulations can also be a boon to the individual sellers as well, as they can now market their property as “eligible for FHA financing.” That is likely to attract more offers that wouldn’t have come to the table previously.
“Going through the single-unit approval process could definitely help you potentially open a wider pool of buyers,” Creamer said.
Perhaps the most impactful change is the easing of restrictions on properties with a commercial space attached. Previously, a condo building that also contained a certain percentage of commercial space was ineligible for FHA financing. This new deregulation gives more latitude to those seeking FHA financing by expanding the allowable non-residential space that a property can have.
Perhaps the most visible example of this is Marina City, Bertrand Goldberg’s iconic, twin-tower development on the Chicago River. The nearly 900 units in these corncob high-rises sit atop a sizable commercial enterprise that contains a hotel, restaurants and a small marina.
“For years I have overseen the Marina Towers Condo Association, and this is the prime example in Chicago,” said Dave Barnhart, vice president of condominium management at The Habitat Company. “Now Marina City, if the board so chooses, will become eligible for FHA financing. That’s a huge plus, both for unit owners who want to sell and those who want to buy.”
There are plenty of smaller properties that, though they may never end up on the cover of a Wilco album, can have a much larger combined impact with these new regulations. From Andersonville to Hegewisch and everywhere in between, Chicago’s neighborhoods are heavily populated with mixed-use properties, typically with first-floor retail and residential space on the handful of stories above.
As more and more residents are seeking dense, walkable areas in which to locate, these types of properties are highly desirable. The new regulations mean that they can also be affordable, for those looking to buy using FHA funding.
This also brings the Venn diagram of first-time buyers, condo owners and those with FHA insurance more into alignment. Because they offer more flexible credit requirements and lower down payment obligations, FHA loans are popular among first-time home buyers. A prospective owner backed by a conventional mortgage lender will typically put up a down payment in the range of 10 to 20 percent of the sale price; those with FHA funds tend to post closer to 3 to 4 percent, on average.
“The FHA program used to be kind of a pain and it really was due for an overhaul,” Barnhart said. “I think real estate professionals are very pleased to see these changes, though it’s probably going to take a little bit of time before the marketplace starts to really embrace what’s happening.”