Prior to 2005, few condominium boards paid much attention to Federal Housing Administration, or FHA, financing. At the time, the FHA only had a small fraction of condominium loans (about 5 percent) and FHA buyers, due to smaller down payment requirements, were considered less committed to their purchased units. A lot has changed since then.
The FHA is now one of the largest underwriters for condominium mortgages, with FHA mortgages accounting for up to one in three new loans in some markets. Most importantly for boards, changes made to the FHA approval process in recent years shifted the burden of qualifying for FHA mortgages from lenders to the association. In fact, many condo buyers are looking for FHA-approved associations as a sign the association is stable and well-governed. So if you live in a condominium, 2017 may be a great time to review the FHA approval process, what it means to your community and if such approval is worth pursuing.
In 2008 the condominium market was in a state of what could generously be described as a collapse. Plummeting prices, spiking foreclosures and vacant towers dotted the landscape. Lenders pulled back, leaving buyers with few options other than cash purchases. In an effort to stabilize the condominium market, the FHA stepped in with new lending guidelines to provide financing to potential buyers. In doing so, the FHA set out a range of qualifications for both borrowers and condominium associations to ensure that any loans would have a lower probability of default. The new FHA standards set worked, slowly but surely, and brought confidence back to the condominium market. FHA loans grew from less than 5 percent of condominium mortgages to more than 30 percent in some markets, and private lenders began adopting some of the FHA’s new criteria.
For condominium associations, it is important to recognize that FHA approval is a more important factor today that it was just a few years ago. First, due to their lending requirements, FHA approval tells buyers your community is well-governed. The FHA requires that an approved community have less than 15 percent of units 60 days delinquent, that they have an adequate budget to maintain the common elements, that reserves are funded and that appropriate insurance policies to protect association assets are in place.
Another critical change is that the FHA eliminated the spot approval process. What this means is that the burden of becoming FHA-qualified has shifted from the lender to the association board. In fact, the entire condominium association needs to be FHA approved prior to any FHA loan being issued for a purchase of a unit. Since FHA project approval takes up to 30 days, associations without FHA approval are likely to lose sales and may face angry unit owners.
For boards who are interested in FHA approval, the process is fairly straight forward, but somewhat detailed. The FHA requires that a project approval meet certain criteria by submitting an application and supporting documentation in order to obtain approval. The FHA examines numerous factors prior to issuing a project approval. These include:
- Determination of adequate budget and reserve funding.
- No more that 15% of units 60 days late in assessments.
- The project has no more than 25% commercial space
- Fidelity, flood and other insurance policies are in place.
FHA approval is seen as critical enough that some states like California and Virginia require the association to disclose the association’s FHA approval status for all potential purchasers. So for associations that want to ensure that units are marketable to the broadest range of buyers, and that want to show non-FHA buyers that their association meets the FHA guidelines, obtaining FHA approval should be a must do item on their list for 2017.
Associa managed condominium communities can take advantage of our FHA Assist service to obtain FHA approval for your association. Our professionals will work with your community manager or board to assemble your FHA approval submission, work with the FHA to address any deficiencies, track approval and provide you with a recertification notice before the two year approval expires.
To find out more ask you community manager or send an inquiry to Natalie Ayers at Nayers@associaonline.com
ABOUT THE AUTHOR
Andrew S. Fortin is the Senior Vice President of External Affairs for Associa. He works to engage government officials, the media and clients in building stronger community associations and help shape laws that support vibrant community associations.