With any home loan you apply for, the federal government (via Fannie Mae or Freddie Mac) has to back up the bank. I guess that's what it means for your loan to be FHA approved. As of about two years ago, the federal government has instituted a rule saying that it will not back up any loan that will be used to finance the purchase of a condo in which one owner owns more than 10% of the complex. As a result, banks generally won't bother issuing loans that will be used to finance the purchase of a condo in which one owner owns more than 10% of the complex.
This rule was put in place in response to the housing crisis. It makes sense in the context of giant establishments (say, hotels) in which one big investor may own a good chunk of the building. Say that investor owns 50% of the building-- If that investor goes bankrupt for whatever reason, the rest of the investors in that building would also get screwed. And so do the banks. So this 10% rule is meant to protect "little" owners, I suppose. It makes it difficult for any one body to own too much of one complex, balances out the distribution of ownership and power, and allows the banks to also protect their assets.
But even the most well-intentioned rules cannot be universally applied. This rule has been quite the pain in the ass for "little" people like my family. For a while now, my dad has been helping my greataunt, who is elderly and senile, with her estate. Seeing that she was running out of money, my dad applied on her behalf for a reverse mortgage. For some reason, this 10% rule came into the picture, and the banks denied her application, precisely because one owner in her complex owned more than 10% of the units. (This is also the fault of her homeowner's association, who didn't step in to prevent this one owner from purchasing that many units.) I don't understand why this 10% rule should apply to reverse mortgages. Seems like an exception should be made, especially for someone in my greataunt's situation. After all, what good is a house you've invested in your entire life if you can't live off of what it's worth once you're too old to support yourself?
My greataunt was not only running out of money, but she was also running out of the mental capabilities of taking care of herself. In order to facilitate her move into an assisted living establishment, my dad had to help her sell her condo. Sure enough, the 10% rule became a huge obstacle. No potential buyer would have been able to get a bank to approve a loan in order to finance the purchase. We were seriously worried that my greataunt would be stuck with this condo as her finances kept draining.
Miraculously, we did get a buyer who was able to pay in cash. So we were able to sell my greataunt's condo, and now she hopefully has enough cash to live on for the rest of her life. But had that buyer never come along, my greataunt would be in dire straits. And even though things worked out in the end, this 10% rule probably cost her tens of thousands of dollars. Given our desperate situation, we had to sell the place at a lower price than we could have had we been open to buyers who could get their loans approved.
This 10% rule continued to be a pain in the ass for my family when we went out to Cambridge to hunt for my condo. The first place we were interested in was one unit of seven, in a building owned by a developer who was selling each unit one buy one. The developer still owned five of the units, so, of course, he owned more than 10% of the units. We were told right away from the New England Moves, the mortgage company affiliated with Coldwell Banker, that they would not be able to finance this purchase. A local lender, East Cambridge Bank, would have been able to, but at a slightly higher interest rate. We did make an offer on that unit, but with some reservations. Even if I could secure the purchase with a loan from East Cambridge Bank, what will happen a few years down the road, when I want to sell the place? If the developer still owned more than 10% of the units, would I have trouble selling the place because no buyer could get a loan? Not willing to risk this, we made a low-ball offer (figuring that we'd get a counter-offer, and thus wouldn't be tied to the contract), and went looking for other units. Luckily, we ended up finding one that we liked even better and in building where this 10% rule wouldn't be a problem. But in the end we couldn't ignore the fact that this rule was affecting our lives at many junctures.
What's truly upsetting is the fact that no one seems to be upset or bothered by this 10% rule. The sellers I've come across during my real estate hunt completely dismiss it. And the morons in my greataunt's homeowner's association totally whitewash the problems the rule causes, in spite of the fact that not one of them will be able to sell their properties. You'd think there would be some amount of public outrage, at least enough for the federal government and the banks to tweak the rule, add an addendum or exception here and there, so that it doesn't end up screwing over average folks who need to meet simple goals like buying a home or selling it, in order to secure their futures. This rule is not helping or protecting people like me or my greataunt. On the contrary, it's only helping super rich people who could buy real estate in cash and bypass the banks entirely. Or, it's helping mafioso banks that are willing to issue unconventional loans at high interest rates. The 10% rule is a good idea gone very, very bad.
Well, maybe my little anecdote here can help spark some conversation at least.
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