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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; E01

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.

"It's crazy," said Emily Fisher, a regulatory lawyer who has twice run into financing problems on a condo in a converted rowhouse in Shaw. "Regulation is kind of my thing, but it's an incredible issue to figure out."

Fisher and her husband, Justin, signed a contract in August 2008 but had trouble financing because rules for new buildings said half of the four units had to be pre-sold. "We were the first purchasers," she said.

"There was only one lender who would work with us," but at a higher interest rate than government-backed loans, Fisher said. The couple and their 1-year-old moved in that October.

The couple has tried for a year to refinance "into one of these great low rates," but the building still can't pass the tests. Private lenders are routinely requiring 20 percent down and as much as 50 percent, agents say. Investors are having to pay all cash.

Another surprise is the limit on building space used for commercial activity, a blow to "multiuse" buildings. A Wethman client tried to buy in Alexandria where a Whole Foods "occupied 43,000 square feet [28.6 percent] of the building," and found that Fannie and Freddie have a limit of 20 percent commercial. "If it's more than 25 percent, you can't do an FHA or VA loan either," the agent said. A Freddie spokesman said waivers can be approved where such usage is typical.

Wethman said condo shoppers need to do more than look at online photos and descriptions of luxury. "They need to understand what's going on with financing instead of saying, 'This one looks perfect, and it's cheap.' " Besides checking FHA's list, they can seek financial information from condo associations and developers.

Buyers have three days after signing a contract to examine financial information in the resale certificate provided by the condo association, said District real estate lawyer Rick Eisen. "For whatever reason, they can walk away if they don't like what they see." The caveat: "You have to be sort of sophisticated to know what you're reading . . . and the information may not be up to date."

New condo builder Jim Abdo said his Metro-centered projects in the District and Rosslyn won't have financing glitches, partly because he limited investor ownership. Also, he said, "we have long-standing relationships with mortgage companies. . . . We have four different pre-approved lenders." The majority of condo buildings on the market in the Washington area are more than 70 percent pre-sold, meeting another big lending test, said William Rich of Delta Associates.

Not everyone looking for a condo is having problems.

Jay Seville, a broker who runs the Arlington-focused "Just New Listings" Web site, said he hasn't "seen much lending drama" in trendy condos in Arlington and Fairfax counties. "Most buildings are FHA-approved," he said. "The problem only occurs if you're unlucky enough to fall in love with a building that's not approved."

Fernando Ferrufino of Redfin said demand exploded for District condos before the federal tax credit expired, but "the difference between April 30 and May 1 was like night and day." The result: "very, very sluggish in new contracts in May."

Ferrufino said a selling point for the District is its $5,000 first-time home buyer's tax credit. "That will help."

Delta Associates analysts see "genuine demand [for condos] in the Washington area," because job growth is so strong, said Alexander Paul, head of national research for Delta affiliate Transwestern Support Group. "It's not all due to the tax credit," he said.

"We did a rough calculation in the fall, about 3 to 4 percent of the annual sales volume locally was due to the credit, versus about 7 percent of the national volume. . . . The impact of the credit locally is overwhelmed by the general improvement in the economy and in the housing market," Paul said.

But market watchers report a divide in demand -- and in the potential for price increases -- between properties outside the Beltway and inside, those near subways and those not. In Prince George's County, would-be condo owners have switched to single-family houses because the prices dropped dramatically, said Michael Cerrito of Cerrito Realty in Upper Marlboro, outgoing chairman of the Prince George's County Association of Realtors.

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