Editor’s note: this week’s guest columnist is Eric Boucher, a consultant who specializes in assisting condominiums in navigating the FHA and VA mortgage approval process. His website is www.ReadySetLoan.com/condo and he can be reached at firstname.lastname@example.org
The Federal Housing Administration, or FHA, is a mortgage loan insurance provider. FHA is housed with The Department of Housing and Urban Development, or HUD. It has a set of guidelines for housing loans and if a borrower meets these guidelines, FHA will insure the loan to protect the lender against losses. FHA is not a loan provider and does not lend money for home purchases.
FHA has different criteria by which it qualifies borrowers than the so-called “conventional” loan programs of Fannie Mae and Freddie Mac. FHA allows for lower down payments and has slightly more lenient credit-qualifying criteria than conventional loan programs.
The FHA program was designed to fill this niche and was intended to have a market share of around 10-15 percent. During the housing downturn that began in 2007, FHA’s market share jumped to more than 40 percent. This was cause for concern and HUD began searching for areas where it could mitigate risk. One of the primary targets was condominiums.
In November 2009, HUD released Mortgagee Letter 09-46b which made three fundamental changes to the guidelines for condominium loan approvals.
First, the “Spot Loan” program was eliminated. Prior to Feb. 1, 2010, FHA allowed loans in condominium projects that were not on the HUD Approved Condominiums List. Instead of requiring that the project get HUD-approved, it would approve single loans in non-approved projects, based on satisfactory answers to a HUD questionnaire. HUD eventually determined that this was beyond its risk tolerance and eliminated the program. Now, for an FHA loan to be used to finance a condominium unit, the project must first be approved with HUD.
New guidelines and processing for condominium project approvals were announced. During 2008-2009, HUD determined that the previous approval process lacked proper oversight. New, temporary guidelines were announced in the Mortgagee Letter as was the requirement for all currently approved condominiums to get recertified under the new guidelines. Tens of thousands of condominiums across the country saw their approvals expire in 2011.
All condominium projects must get recertified every two years to remain on the Approved Condominiums List. HUD had initially intended for condominiums to go through a recertification process to determine if the projects continued to meet its criteria. Initially, there was talk about requiring recertifications every year but HUD settled on two years.
The question for Associations now becomes: “ Should we be on the Approved Condos List?” As a condominium project consultant who assists associations to get on the list, my answer should be “absolutely!” But the honest answer is that it depends on the condominium location, make-up and market value of the units.
Some condominiums simply do not meet FHA’s guidelines, such as condo-hotels and those in coastal barrier zones. Others have sales prices that greatly exceed FHA’s maximum loan amounts.
Roughly 40 percent of all new loans are FHA loans. FHA’s “sweet spot” are loan amounts in the range of $100,000-250,000. It is not uncommon for FHA loans to encumber 20-40 percent of the units in condominium projects with unit values in this range. By not being on the Approved List, the association could be reducing its buyer pool by this amount.
HUD-approved condos promote owner-occupancy. A much higher percentage of investors use conventional loans with larger down payments. Not having availability to FHA loans in a condominium has a tendency to attract buyers who are investors, especially with sales prices in the range of $50,000-150,000. Once the investor ratio tops 50 percent of the units, financing for units becomes very difficult to obtain.
The bottom line: getting on the Approved Condominiums List is a proven method for attracting more buyers and buyers who intend to occupy the units. Overall, this is beneficial to the financial stability of the condominium and the community as a whole.