FHA in an attempt to stop the influx of loan defaults on condos has published some new guidelines that may help that problem but is creating a far bigger problem in the end.  Most first time home buyers today are using FHA financing because it requires the smallest down payment (3.5% compared to a conventional minimum of 10%) and has the most flexible credit terms.

FHA has always required a condo building or development to meet certain requirements in order  to ‘be approved for FHA Financing’.  Once a condo development was approved, it was listed on the national on-line web site and stayed there until someone removed it (which never happened).  If a lender came across a development that was not on the list, there was a procedure he could follow to get it added. This usually only added a couple of weeks onto the close date of the loan and rarely caused a loan denial.

Recently FHA decided to require all condo developments that were approved prior to  January 1, 2008 to re-qualify and against stricter criteria.  Many if not most of these developments will not meet the new criteria making them almost impossible to finance.  Convential lenders often times use the same FHA approval list. If Sellers can’t sell, then foreclosure rates will increase making the problem worse.