Condominiums are an excellent choice for young buyers seeking affordable homes accessible to work, retail and entertainment destinations. They’re also a great option for boomerang buyers getting back in the market, along with downsizing seniors wanting a safe, minimum-maintenance lifestyle.
Until this year, condo buyers looking to finance their new home with a low down payment FHA loan have had limited choices. The Federal Housing Administration (FHA) would not finance condos in buildings where more than 50 percent of the space was occupied by rental or commercial users. The agency required buildings to have at least half its units occupied by owner-occupants. As a result, less than 10 percent of the estimated 150,000 potentially eligible condominium projects in the U.S. were certified for FHA financing, according to the Community Associations Institute.
Under pressure from consumers and the housing industry, Congress passed legislation authorizing the Department of Housing and Urban Development (HUD) to loosen its 50-percent rule in July 2016. By the end of the year, several changes made more condos available for FHA financing by lowering the owner-occupancy threshold to 35 percent. To be eligible for the lower owner-occupancy rules, the condo development must be more than 12 months old.
FHA could loosen its owner-occupancy rule even more without risking more defaults, according to a study by the Urban Institute. The study found that:
- Condo borrowers have higher credit scores than noncondo borrowers. In recent years, the difference has been 10 and 15 points. For 2015, the average credit score for a condo purchaser was 694; a noncondo purchaser, 681.
- Condo loans have higher balances than noncondo loans. That is, for 2015, the average condo purchase loan was $206,200; for noncondo loans, $188,400. This pattern has been consistent since 2003. While many of us tend to think condos are less-expensive first purchases, they tend to be located in higher-cost urban areas.
- Condo loan borrowers have slightly higher monthly incomes than noncondo borrowers, and the gap has increased in recent years. In 2006, noncondo borrowers had an average monthly income of $1,052, while condo borrowers averaged $1,224. In 2016, the average monthly income was $1,397 for noncondo borrowers and $1,693 for condo borrowers.
- Condo borrowers are likelier to be women. In 2015, 46 percent of condo borrowers were female versus 35 percent for noncondo borrowers.
If you are in the market for a condo, you can go to this listing of buildings approved for FHA financing.
Published Aug. 7, 2017
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