By BankingMyWay.com Staff
The recent housing crisis and credit crunch has triggered a number of reactions in the market. One such reaction has been in the private mortgage insurance industry. Private mortgage insurance (PMI) protects lenders from losses should a mortgage go into foreclosure.

Most lenders require PMI for loans in which less than 20% of the loan amount is put down upfront. The PMI is meant to compensate for equity and shield the lender. If the borrower does default on the mortgage and the home is sold for a loss at auction or as an REO, the PMI insurer covers the difference.

Because of falling home prices around the country, many private mortgage insurance companies are restricting policies. PMI policies for condos have been severely curtailed in many areas around the country, regardless of a borrower’s financial situation. Some insurers will write a PMI policy in areas where real estate markets are still robust, but even in these markets, additional restrictions have been implemented. For example, borrowers may not be able to get PMI on a condo in a development where more than 30% of owners are investors. In some cases, putting down at least 10% might convince a PMI underwriter to approve a policy, but that isn’t guaranteed.

The restrictions on private mortgage insurance make it more difficult for low to middle-income homebuyers, who often cannot come up with a 20% down payment, to purchase condominiums. This is particularly problematic for tenants of apartment buildings who will be displaced by a condo conversion.

The Federal Housing Administration (FHA) has a program that provides mortgage insurance for condominium units that may help offset the restrictions made on private mortgage insurance. The program (Section 234 (c)), insures a loan for up to 30 years on a unit in a condo building. Buildings must have at least four units, but can be walk-up or elevator buildings, and they can be detached, semidetached or row homes.

Section 234(c) mortgage insurance is very similar to the Section 203(b) mortgage insurance for one to four family homes. Borrowers can finance about 97 percent of the homes cost as well as some of the closing costs. Upfront costs for FHA loans are low however the same limits on the size of the loan for one to four family homes also apply to condominiums.

In addition, Section 234(c) mortgage insurance is not available for condominiums converted from rental housing unless the conversion is more than one year old or the borrower was a tenant in the rental. Section 234(c) mortgage insurance is also available if “the conversion of the property is sponsored by a tenant's organization that represents a majority of the households in the project. According to the Housing and Urban Development (HUD) web site, “80 percent of FHA-insured mortgages in the project must be made to owner-occupants.”

Eligibility for Section 234(c) mortgage insurance is extended only to owner-occupants who meet the FHA underwriting criteria. Obtaining this insurance is done through FHA-approved lending institutions -- the HUD web site provides a Lender List to help you find an FHA-approved lender in your area.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.