Take the condo crisis quiz!

It’s never been harder to buy a condo in the city. Just ask Emma Harris, who started her search for a one-bedroom condo unit in Edgewater back in February.

Harris, a 2008 Loyola University grad who now works as a retail manager in the Loop, wanted to take advantage of falling prices, record-low mortgage rates and a stunning choice of brand-new condos sitting vacant in new developments, or in bank-owned foreclosures.

But she and her mother, Dee Harris, quickly found, as have many condo buyers and sellers lately, that they -- and the condo building itself -- faced new, tougher guidelines for a mortgage that would qualify, or “conform,” in banker lingo, for backing by Fannie Mae and Freddie Mac, or insurance from the Federal Housing Authority.

“We waited and waited and waited. It was really frustrating as a person’s who’s ready to buy,” said Dee.

After losing out when so many condo mortgages went delinquent or fell to foreclosure, lenders now require higher down payments, more fees or higher interest rates for condos, as well as restrictions on the property and its homeowners association that make it nearly impossible for many potential buyers, and new projects, to qualify. The result, real estate experts say, could be years of overhang from failed developments.

Nearly all lenders issue mortgages according to rules from Fannie Mae, Freddie Mac and the FHA. These institutions will purchase and securitize, or in the case of the FHA insure, loans, but only if they meet set requirements.

Fannie Mae, which owns a quarter of U.S. mortgages, announced last month that for a condo mortgage to qualify, its building must be at least 70 percent sold (up from 51 percent previously) and no more than half its units can belong to investors. Also, the condo association must be in good financial shape, with at least 85 percent of owners up-to-date on association fees.

"Fannie Mae's presale guidelines are aimed at protecting prospective condo buyers from investing in projects that have a higher risk of failure,” said Amy Bonitatibus, the company’s spokeswoman, by e-mail.

Fannie will make exceptions for condo buildings that don’t meet guidelines, but have other ways of proving their financial sustainability, Bonitatibus said.

“With condos, you have to do a lot more research in advance. The guidelines eliminate quite a [few] projects,” said Harris’ real estate agent Mabel Guzman, with Century 21 SGR Inc. in the South Loop. “You have a consumer, and you tell them ‘it’s going to be challenging.’ You’re really counseling the buyer.”

For instance, if buyers can’t put 25 percent down, Fannie and Freddie tack on an overlay fee of 0.75 percent of the amount borrowed. If it’s a second home, there are even more restrictions: Buyers must also complete a questionnaire about the condo association and insurance policies for common areas.

If it’s an investment property, Fannie and Freddie won’t securitize the loan at all, so investors must look for private funding or loans from small, neighborhood banks, according to Frank Binetti, president of the Illinois Mortgage Bankers Association.

“It’s very restrictive,” said Binetti, who’s also the vice president of residential mortgage lending at Lincoln Park Savings Bank in Chicago. These conditions apply even to people with very good credit. Today, buyers need a credit score of 740 to get the best interest rates, a figure that used to be as low as 680, he said.

Emma and Dee had good credit scores and were ready to put 20 percent down. They started off looking among bank-owned and foreclosed condos, but ended up waiting days or even weeks to hear from banks after putting in offers.

Even after getting approval for a $97,000 one-bedroom condo unit in an FHA-approved building on North Sheridan Road, the Harrises struggled to get in touch with the banks to move the deal forward.

“They’re only open 9 to 5. You can’t reach anybody after that or on weekends,” Dee complained. “These short-sales and bank-owned [condos], they’re dragging their feet too long.”

Dee and Emma decided to buy from a “real person” instead, and within a couple of weeks, they set a closing date for a seventh floor unit in the same building, at 5815 N. Sheridan, with a view of the lake that Dee can’t stop talking about. The cost was a little higher than the bank-owned unit, in the low $100,000s, but the deal was more efficient: They closed on the condo this week.

To avoid a lot of the hassle of reviewing regulations property-by-property, the FHA has a list of buildings that qualify, including 444 in Chicago. But these tend to be older buildings with more established condo associations, since the FHA requires 90 percent of the units in a condo building be sold.

Fred Scovell, a Realtor with Rubloff Residential Properties’ Scovell+Sabatini Team, said these properties are best for buyers who want a deal fast, while those willing to wait can negotiate with new developers.

“If they want to close within 30 to 60 days, I suggest that the purchasers look at buildings that are one to five years of age,” said Scovell. “The advantage of looking at a building that’s completed and turned over to a homeowners' association is that you’ll get a look at what the [monthly] assessment will be.”

Complicating the condo market, though, is the glut of foreclosed condos in Chicago. When units fall into foreclosure, banks take them over and sell them, usually quickly and cheaply to investors. Then, once investors own more than 15 percent of a building, unsold units in that building no longer qualify for mortgages from Fannie, Freddie or the FHA.

“That’s an example of when a building becomes sick because no one can qualify to purchase,” Scovell said.

Many in the industry still speculate that a full recovery is far-off, as these failing developments stand to have long-term effects on the real estate market.

“That big change with condos is a result of the government trying to fix things. I would love to go to Washington and tell them how bad things are” as a result of the changes in Fannie and Freddie guidelines, said Mary Curran, president of Highland Financial Corp. in Northbrook.

While tax credits for first-time homebuyers and other government incentives encourage people to buy single-family homes, the lending restrictions on condos seem to discourage buyers in Chicago, where so much of the affordable, available housing is in multi-unit condo buildings.

“The government isn’t looking at buying real estate in the central part of a city,” Scovell said.

During her chaotic condo search, Dee Harris noticed this too.

“It’s an FHA building, we get the stimulus package, that part was wonderful,” said Harris, of the unit she and her daughter ultimately chose. “But those bank-owned and short-sale [properties], they just dragged on. The government needs to know. They need to get something done.”