There are two main forms of mortgages that are used to purchase condos today. One type of loan is known as a Conventional Loan. Conventional Loans are issued by banks and conform to Fannie Mae (FNMA) and Freddie Mac (FHLMC) lending guidelines. The second type of loan is an FHA loan. FHA loans are also issued by banks, but the loans carry mortgage insurance from the Federal Housing Authority (FHA), a federal government agency in the Department of Housing and Urban Development (HUD). FHA loans used to be fairly rare, but in the real estate downturn, the ability to obtain an FHA loan has become a critical factor for many buyers when purchasing a condominium. If you live in a condominium and are thinking of selling in the next few years, it is critical that your condo association seeks FHA approval so that prospective buyers can use these loans for your condo.
Why are FHA loans now important?
Loose lending guidelines caused the banking mess that we are now in and the resulting downturn in the housing market. Facing mounting defaults and losses on home loans, banks retreated from making new home loans and severely tightened their credit requirements for obtaining a new home loan. Banks were only willing to loan their money to the most credit-worthy borrowers with large down payments, strong income and low debt. Borrowers with weaker credit, smaller down payments or lower cash reserves either could not obtain a loan, or were faced with expensive loan options.
FHA loans are government-backed loans designed to offer affordable housing alternatives for borrowers who have lower down payments and weaker credit situations. After the banks severely tightened their lending guidelines, FHA loans became an attractive and affordable home loan option for many home buyers and home owners. Because FHA provides a government guarantee to banks who write loans to their guidelines, the banks are willing to offer loans to people who might not otherwise qualify for a conventional loan.
I’ve seen varying estimates, but the percentage of new FHA loans during the housing bubble was something under 4% of all home loans. After the housing market decline, FHA now represents a huge percentage of new home loans, often 40%-50%+ in some markets. Looking at some local data, 27% of condos purchased in King County so far in 2010 have used FHA loans. The bank forecasts I have seen indicate that FHA loans will remain extremely popular during the next few years.
If you are selling a condo, your condominium complex must be FHA-approved before a buyer can obtain a home loan. If your condo does not have FHA-approval status or does not qualify under FHA guidelines, there is an enormous pool of potential buyers who will be unable to buy your property. When we work with buyers who require an FHA loan, they will actively ignore properties that are not FHA-approved. Less demand for your condo will result in lower long-term property values.
Is my condo already FHA-approved?
Many condos do not have FHA approval status. They may qualify for FHA approval, but many did not see the need to obtain the approval in the past. To check the approval status of your condo, you can visit this page on the HUD website. It is not the most user-friendly site, so you may have to try a couple of different queries to locate your condo. You can also ask your Home Owners Association (HOA) manager or board members for the FHA status of your condominium.
How can my condo obtain FHA approval?
FHA does have a set of guidelines that a condo must meet before they can can obtain FHA approval. These guidelines deal with the percentage of renters/investors in the complex, financial status of the HOA, and reserve budgets for future repairs. Not all condos will receive approval, but many are eligible. The approval process involves submission of a variety of condo documents to FHA, including documents like condo declarations, association bylaws, association budgets and reserve studies.
There was a major change to the FHA condo approval process on February 1, 2010. Prior to that date, a condo buyer could seek an FHA “spot approval”, which was a one-off approval of a particular condo unit. The spot approval process was an efficient way to quickly obtain FHA approval. The process changed in February, and now FHA approval must be obtained for the entire condo complex. While the process has been streamlined, it is more complex and may still take a couple of months to complete.
There are two current methods that can be used for FHA condo approval. The first involves submitting paperwork through the HUD Review and Approval Process (HRAP). There are also lenders who have been authorized by HUD to review and approve condo projects. This is known as the Direct Endorsement Lender Review and Approval Process (DELRAP). Only certain lenders have been approved for this process, since it requires dedicated staff and FHA expertise.
If you want a deeper dive into the FHA eligibility requirements and approval process, you can read more about it in this HUD publication.
My condo complex is not FHA approved. What should I do?
FHA approval for condos is critical for maintaining property values and being able to sell your condo complex to the widest pool of potential buyers. If your condo complex has not gone through the approval process, you should request that your HOA board members and management company spend time to go through the process and obtain approval. It can be helpful for the association to hire an FHA consultant who can guide them through the approval process.
If your condo complex does not qualify for FHA approval, you should become an active member of the association and suggest changes to the association budget or rules that will enable FHA approval in the future. Some of these changes may be financially painful for the association and current condo owners, but ultimately it will improve the long-term financial health of the condo association and help maintain property values.