Correction to This Article
This article about the condominium market misstated the number of Washington area condo complexes approved for Federal Housing Administration-insured mortgages. The article said that 342 are approved in the District and 501 each in Maryland and Virginia. The correct numbers are 335 in the District, 1,207 throughout Maryland and 1,844 throughout Virginia. D.C. area numbers for Maryland and Virginia are not available.

Financing rules complicate search for dream condo

By Sandy Fleishman
Special to The Washington Post
Saturday, June 26, 2010

If you've been looking to buy a condo in the Washington area, you know there are deals to be had. But look carefully before you leap, say real estate agents and some buyers. A multitude of rules could block your way.

Prices in many areas -- not counting hot Metro-centric neighborhoods such as Rosslyn-Ballston and Dupont Circle and Logan -- are expected to stay flat this year, a condition that favors buyers. But borrowers need to have stronger credit and less debt than in the go-go years, even though interest rates are near record lows. And some people are finding that although they may qualify for financing, the building they have fallen in love with does not.

The Federal Housing Administration tightened loan guidelines in the past two years on borrowers and on buildings. Fannie and Freddie, have similar "condo review" rules for loans they will buy.

"Getting financing is the biggest problem with the condo market right now," said Fred Bowers, vice president of Intercoastal Mortgage Co. in Fairfax. "The big 'trip' factor has to do with the owner-occupancy concentration" in the building, or limits on how many owners must live there rather than rent out.

For new buildings, a big hurdle is how many units have to be pre-sold. The panoply of restrictions makes for confusion and delay, agents say. A key escape hatch for potential FHA borrowers closed in February when the agency eliminated "spot approvals" for individual units within unapproved buildings. Now loans won't be made to a buyer unless the whole building is approved.

Delta Associates, a research firm in Alexandria, estimates the metropolitan area, the fifth-largest condo market nationally, has 2,000 such buildings, with 220,300 units. As of early June, 342 of those properties were approved in the District and 501 each in Maryland and Virginia.

Government contractor Blair Goodrich, 32, stumbled over financing in March on a two-bedroom condo near Old Town Alexandria. She liked the price. "It was in the $250,000 to $300,000 range, where there usually isn't that much available," she said. She qualified for a private loan, with 10 percent down, when she signed the contract in April. But she couldn't get mortgage insurance because insurers said Fannie/Freddie guidelines allowed no more than 30 percent of the units to be leased. "My building had 35 percent," she said. (Freddie officials said that there has been confusion about the rules and that there is no such limit in established buildings if the buyer plans to live there.) "The problem was not with me, it was with the property," Goodrich said.

Goodrich then turned to the FHA, but the building wasn't on FHA's approved list.

Two months later, after Goodrich sublet her apartment and lived with a friend, the building was approved. If her lender hadn't submitted the extra paperwork, she wouldn't have gotten a loan until someone else succeeded, said her agent, Katie Wethman of Keller Williams Realty in McLean.

With more people turning to FHA for its 3.5 percent down payment, tighter rules are problematic, particularly for first-time buyers, said Tom Murphy, a Long & Foster agent in Foggy Bottom. FHA requires that half the units in established buildings be owner-occupied.

"It's very, very difficult now getting a mortgage in the older buildings" in the District, Murphy said. "A lot of investors who were flippers in the old market got caught when prices were down and had to either give up their deposit or go to settlement and rent them out."

Now investors can't sell through FHA until other investors get rid of their units. Owners who live in the building can't sell through FHA until the investors sell. "It's very circular," mortgage lender Bowers said.

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