Tougher standards for financial stability and creditworthiness are derailing Washington-area condo sales but it is not the borrower's qualifications that always are in question.


Many condominiums are struggling to pass strict guidelines to qualify for Federal Housing Administration financing which, in the past, homeowner associations did only once to receive the agency's stamp of approval indefinitely.

Last December, FHA began requiring condominiums to be recertified every two years. Communities were given a series of rolling deadlines to reapply, with the last one expiring this September.

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So far, nearly 25,000 condominium developments around the country, whose deadlines to recertify have already passed, didn't renew.

"They either knew they wouldn't be able to meet the standards or they applied and were turned down," said Brian Sullivan of the Department of Housing and Urban Development.

Recertification has "everybody scared of their shadow," said Tom Meyer, president of Condo 1, a Northern Virginia real estate agency specializing in condominiums.

Many of the requirements, such as having the equivalent of 10 percent of the condo's annual operating budget in a reserve fund, "were never really enforced before or looked at closely," Meyer said.

Locally, about one in 10 condo transactions runs into difficulties over certification, said Sweth Chandramouli, a Realtor and lender with Ethical Homes.

Along with inadequate reserves, owner occupancy ratios and delinquency rates also are tripping up area condominiums -- particularly older communities that were first certified many years ago. Under FHA rules, at least 50 percent of the units must be owner occupied and the number of owners with condo fees in arrears by 30 days or more cannot exceed 15 percent.

Newly built condos are more likely to run into other challenges, particularly the restriction limiting commercial space to less than 25 percent of the property.

"You have beautiful new condominiums like the Waterview in Rosslyn, where you can't get FHA financing because the first four floors are a hotel," Meyer said.

Other new developments run afoul of an FHA rule that caps the number of units owned by any one investor at 10 percent. That has caught some builders, who were unable to sell all of their units during the slow housing market, off guard.

Meanwhile, conventional lenders and mortgage insurers often have their own requirements to limit their exposure in any one community. While some demand owner occupancy ratios of 70 percent, others will make the loan no matter what the ratio if they are familiar with the community and it meets other criteria.

In some cases, "It gets down to the strength of the borrower," said Fred Bowers, vice president of Intercoastal Mortgage. A highly qualified borrower can make up for a property that may not meet all the lender's criteria, he added.

But borrowers who need FHA financing and fall in love with a condominium that hasn't been recertified are out of luck.

"I advise the buyer that this is going to be a waste of our time," Chandramouli said.

Sellers have a few options, including pushing the condominium board of directors to get the community recertified, assuming it would pass FHA's standards. If not, "there's little that sellers can do other than cut their price and be as competitive as possible," Meyer said.

The increased scrutiny may seem like an added burden to buyers, but "FHA is really protecting borrowers," Bowers said. "FHA doesn't want these people to be in a situation where their condo fee suddenly goes from $300 a month to $700."