The Good And Bad Of Recent FHA Changes

FHA has been a popular financing option for condos because of the tightening mortgage guidelines on conventional condo financing and because of the FHA’s low down payment requirement. Currently representing 30 – 40% of the mortgages, any changes to this program can have a huge impact on the housing market. And one such big change just went into effect.

On February 2nd HUD (the Department of Housing and Urban Development), which administers FHA, switched to a new condominium approval process and it represents both good and bad news to the condo market. The good news is that buildings with the right of first refusal (and there are many of them) can now be FHA approved. The bad news is that the FHA spot loan is no longer available – which means that it is no longer possible to quickly approve an individual condo for an FHA mortgage. These changes will cause temporary headaches for lenders and homebuyers.  Why?  Because in the short run there will be fewer condo properties that are eligible for FHA financing.

So how do you get the condo you want to buy or sell approved for FHA financing now that spot approval is gone?  As Pete Thompson’s post explains it is now a bit of a can of worms (or as the British say “a bit of a dog’s breakfast” – not that British dogs eat worms). Basically, the entire building has to be approved and under the new guidelines, there are two ways to approve a building:

  1. Go directly to HUD (HRAP) and file all the paperwork directly with them
  2. Go to an FHA Direct Endorsement lender (DELRAP) who has the authority to approve the projects on their own

Despite the complications we are advising our seller clients to pursue these options – after all how can you ignore 30 – 40% of the buyers? There is an entire questionnaire that needs to be filled out but some of the key red flags are as follows:

  • Is the project involved in any litigation?
  • Does any single entity own more than 10% of the total units?
  • Are more than 15% of the owners delinquent with their association dues?
  • Are at least 50% of the sold units owner-occupied?
  • Does the project meet requirements for FHA concentration (no more than 50%, unless certain conditions are met)?
  • Are there any pending special assessments?

We are working with mortgage lenders like Pete who can facilitate the approval process. But there is a cost, since the process is more involved and the lenders need to be really, really careful. For instance, getting an 11 – 25 unit building approved will cost around $2,000. However, when you divide that up among the number of units it’s not that bad and well worth it. Surely this approval increases the value of a unit by more than the $100 – 200 share of costs on average.

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