The Federal Housing Authority (FHA) recently changed several of its outdated and controversial guidelines, which might help those looking to buy or sell a condo. Rule changes are “temporary” but include things such as increases to the allowance on percentage of commercial space within a condo project, increased flexibility on percentage of delinquent HOA dues, less liability for HOA Board Members who sign off on the FHA application, as well as allowances for increases in the number of units that can be rented at one time or owned by one person in a building. All of these changes have the ability to help condo buildings, condo owners, and of course buyers who are using FHA loans.
A recent article in the Seattle Times summarized some of the key relaxed guidelines the FHA recently announced. I wanted to share this article with you and go into more detail about how it affects us here in Seattle. If you are a buyer, seller, or HOA board member, and FHA has been a topic of recent discussions, you might want to revisit it. As of September 13th you now have more options so I’d take another look to see if your condo building or one you thought about buying in might now be in a position to get FHA approval.
FHA offers loan products to those buyers that have a hard time qualifying for conventional loan products. With mortgage guidelines tightening up, many buyers, who would like to buy, simply can’t get conventional financing because of either a tarnished credit score, lack of available down payment funds, or a high debt to income ratio. FHA loans have been a great option for those buyers. However, several condo projects in our city, and across the country, have recently found themselves losing their FHA approvals. Other buildings who wanted to go through the approval process found they didn’t qualify because of FHA’s guidelines. But those guidelines have changed.
The previous FHA guidelines had many of our multi-use condo building's handcuffed to only being able to use conventional loans because of the percentage of commercial space allowed by FHA. An example of this would be 2200 Condominiums in South Lake Union and TribeCa Condominiums on Queen Anne, both of which have large grocery stores and other retail spaces. It’s funny to me because most of us urban dwellers would find this to be a great convenience and maybe even pay a bit more for the luxury of living so close to these amenities. But to FHA they pose a risk apparently so they have guidelines that limit the overall percentage of commercial space allowed. I find myself scratching my head often these days J But with so many developers seeing the value in mixed use construction, it's about time FHA woke up to realize they are alienating good condo projects with this old guideline. In the past up to 25% commercial was allowed and now this is increased to 35% and even higher with case by case review of up to 50%.
Owners’ delinquent on their Dues also poses a problem for lender approval. Until the changes were made, just a few condo owners 45 days late could throw the allowable percentage off and prevent FHA approval. More flexibility on this is now allowed with up to 60 days delinquent being allowed as long as no more that 15% of the units are 60 days or more delinquent.
Additionally, some HOA board members were fearful of wording within the application package that required board members to sign and certify the application indicating they are basically guaranteeing the information in the package was all accurate and the condominium would not pose a risk to lenders portfolios, etc. It also left them on the hook indefinitely to notify FHA of any changes or noncompliance. Crazy right? This is a lot to swallow for many HOA boards as they volunteer their time and they depend on the reporting and accuracy of financials and documents prepared by property management companies, attorneys, etc. FHA finally realized this hardened stance was preventing application from good quality condo projects and made that change as well with much softer terms the HOA must agree to.
Another big issue, since our recession, has been the number of rentals and investor owned units in a building. Condo owners who ideally would love to sell and need to move are limited by decreased market values and they end up becoming what is known as an “accidental landlord”. This also happens to developers who can’t sell all of the units in their buildings. This drives up the number of rentals in our condo buildings, which often will exceed the previous guideline limitations. FHA has softened this as well and allowed some new flexibility that is also extended to condo projects that are, or recently were, under construction or were converted from apartments. Not too many of these remain in Seattle where developers are still selling unsold new or converted units, but some do remain and this can be helpful for developers to get FHA approval earlier in their sales process. New condo projects like Insignia, just breaking ground in Belltown, will likely benefit as well.
Another item to note, FHA now requires condos to renew their approval every two years. It is important as a condo owner to be aware of this and make sure your Board or Property Management Company is on top of renewing before the approval lapses. It is easier to simply renew your existing approval than to re-apply.
FHA – the Pros:
- FHA building approval is worth getting if your condo building has units with market values of under $567,500 (as that is the FHA loan limit as of today) in order to increase the number of buyers that can purchase in your building
- FHA allows buyers to purchase with as little as 3.5% down, with a higher debt to income ratio and with slightly lower credit scores than conventional loans
- Note: FHA borrowers are not necessarily bad condo owners with terrible money habits, but rather circumstances for some people over the past few years have impacted credit scores and resulted higher debt burden so the FHA program offers a chance for them to take advantage now of great condo prices, and the current low interest rates
- Buyers still have to produce income verification, employment verification, work history and savings are still reviewed and approved
- Building approval allows owners, in some cases, to also refinance with less equity available in their condo so they can capitalize on either lower rates (if applicable) or just refinance out of adjustable rate mortgages
FHA – the Cons:
- Buyers will pay a slightly higher interest rate with FHA loans
- Buyers will pay an upfront mortgage insurance premium at closing
- Buyers will pay a monthly mortgage insurance amount for the life of the loan
I believe that the FHA loan product and FHA building approvals are good tools to help the market gobble up some of the languishing inventory here in the city by opening up the buyer pool and by providing more building options to those buyers. Ultimately, I think these changes go a long way in helping some sellers who need to sell do so, and helping more buyers to buy so that we can move through condo inventory more quickly.
I’m by no means an FHA or mortgage lending expert and this just summarizes the requirements. There is more to learn and to be aware of so be sure to do your own research. But this is sure some great news from FHA that might help many buyers, sellers, and HOA’s!
To find out if a condo building is already FHA approved you can go to the FHA Condo Approval form here (I recommend searching by zip code to get a list of all of them in that zip code since the address and name fields must be entered exactly correctly). Or just drop me a line and I can help with looking it up for you.
Note: these are pretty technical documents designed for lenders and underwriting departments so don’t feel overwhelmed. There are people that can help you through the process. Also, you do not need to pay for FHA approval, but if your board needs additional guidance, we can also recommend consultants who can, very affordably, help your board collect the needed documents, complete that paperwork and submit it to FHA. Many of the property management companies are also a great source or help if they helped other condo buildings in their portfolio go through the process.
By Marco Kronen with Seattle Condo Review: A guide to Seattle Condos exclusively for buyers and sellers