Sellers should ensure that condo projects are on approved list for FHA mortgages
Condominium owners who are trying to sell in today’s agonizingly slow housing market should make sure that their community is on the Federal Housing Administration’s approved list. Ditto for someone who is thinking about refinancing a condo.
Under a little-noticed edict put in place in December, the FHA is no longer approving mortgages on condominium units on a spot, loan-by-loan basis. Now the entire project must be cleared by the agency before a buyer can purchase a unit in the community with a government-insured mortgage or an owner can trade in his loan for a less expensive one backed by the FHA.
FOR THE RECORD:
FHA condo list: An article in Sunday’s Business section about the Federal Housing Administration’s list of approved condominium communities and its implications for condo owners and buyers gave an incorrect Web address for an information service to be launched by the end of this month by FHA Pros. The address is www.CheckFHAApproval.com —
That’s important because FHA financing is being used more frequently today than at practically any other time in the agency’s 76-year history. Three years ago, Uncle Sam insured only 3% of all loans. Now the government backs almost 1 in 3 loans. If your condo project is not on the agency’s approved list, you could be missing a significant part of the market.
FHA approval “opens up your market to a much larger buying pool,” said Jamie Thompson, an agent in the Beverly Hills office of Prudential California Realty.
If yours is a $1-million condo, gaining approval isn’t important. But if it’s valued at no more than $729,750, the congressionally imposed ceiling on FHA financing, “it’s almost critical” to be on the cleared list, Thompson said. “If you’re not, you are going to miss 30% of the market.”
The FHA doesn’t make mortgages — at least not directly. Rather, it insures lenders against the possibility that a borrower may not make his payments as promised. Consequently, lenders love the loans because the government, not the lender, is on the hook should someone default.
With their low down-payment requirements and liberal underwriting rules, FHA loans are highly coveted by borrowers too. That doesn’t mean they’re only for low-income borrowers. On the contrary, they’re open to anyone regardless of what they earn. And would-be borrowers are properly vetted just like those who are seeking conventional financing.
But with down payments of just 3.5% and “extremely liberal” debt-to-income ratios that, according to Jacksonville, Fla., mortgage broker Patrice Yamato, sometimes stretch beyond 50% for borrowers with good credit scores and loads of assets, FHA loans are the hottest game in town.
Late last year, though, the government said entire condo projects must meet certain standards before the FHA will back even a single loan in any particular property. Worse, perhaps, is that as of the end of June just slightly more than 32,000 properties had been approved, said Vicki Bott, deputy assistant secretary for single-family housing at the Department of Housing and Urban Development, where the FHA is housed.
If that doesn’t sound like many, you’re right. Although no one knows for certain exactly how many condominium projects there are, the Community Assns. Institute estimates that roughly 40% of the nation’s 305,400 association-government communities are condos. If the institute is on target, some 122,000 condo properties exist in the U.S., and only about one-quarter of them are on the FHA’s approved list.
To find out if your condo is on the list, go to the FHA website at https://www.fha.gov, look under “Resources” and select “HUD Approved Condominium Projects.”
The government site is a free service, but you’ll have to know the exact legal name of your project. So it might be easier to pay $2.99 to https://www.CheckFHAApproval.com, a site that will launch by the end of this month and requires only an address to determine whether the property is approved and eligible, approved but possibly not eligible, or not approved and ineligible.
The CheckFHA report also notes whether the property is involved in litigation, the percentage of units financed by the FHA, the percentage occupied by owners and the percentage of investor owners. Because of the FHA’s strict condo rules, each bit of this kind of information is important.
“It’s like a Carfax for the FHA,” said Christopher Gardner, founder of a Westlake Village company called FHA Pros and a former loan broker, who said he quickly saw a need for such a service when the FHA stopped approving spot loans. CheckFHA is the outfit’s address-checking platform.
If your project is not listed, you’ll want to move as quickly as possible to gain approval because it could take some time. After all, said Thompson, the Beverly Hills agent, “this market is so soft that you don’t want to miss out on any potential buyer.”
HUD’s Bott says it takes an average of two weeks to process a request, but that can vary widely based on the volume and whether the initial submission is complete or additional documentation is needed. But Thompson says a new and small condo property she is representing in Larchmont has been waiting for six weeks and still no word.
For that reason, buyers who plan to finance their purchases with FHA-insured loans and are interested in a particular condo property will want to be certain the project is on the approved list. Otherwise, you could be spinning your wheels.
Moreover, Thompson said, it’s “a real challenge” to find out if the property is approved. “Getting information from listing agents is nearly impossible because they don’t know who to ask. Even management companies often don’t know.”
There are several ways to go about getting a project approved. Lenders who have delegated underwriting capabilities can clear a property, but it’s doubtful lenders will do that on their own unless someone already has applied for financing — and buyers rarely line up their loans before they go shopping.
A condo association also can initiate the process, as can a property-management company, if there is one. So can a lawyer, but only one who is well versed in condo law. The builder can start the ball rolling too, if it’s a new project.
Yet another alternative is to allow Gardner and his colleagues at FHA Pros to navigate the process for you. The company helps homeowner associations, management companies, realty professionals and individual buyers and sellers obtain FHA approval status. The cost is $1,000 plus up to $1,000 more in separate legal fees.
According to the government, the “vast majority” of requests for FHA approval go through smoothly. But there are numerous requirements, such as no more than half the units in the property can be financed with an FHA loan and owners must occupy at least half the units. A problem with any one of the rules can set the approval process back by weeks.
One of the more frequent issues that can delay the process or stop it is litigation, Bott said. For example, the property cannot be involved in a defect suit against the developer. Other major issues are association dues and budgets. No more than 15% of the total units can be in arrears, and budgets must contain a provision for reserve funds to address future repairs.
Distributed by United Feature Syndicate
