Tag Archives: fha approval

What changes to the new FHA condo rule that establishes Single Unit Approval are we sure of?

For the past several years, NAR, MBA, NRMLA, and every minority home buying organization in the country, has been hammering away at HUD to bring back the FHA condominium loan program called “Spot Approval”. Spot Approval allowed FHA mortgages, for purchase or refinance, forward or reverse, in associations that were not certified and approved by HUD. Currently, a condominium must be approved and placed on the FHA roster for FHA mortgages to fund within them.

Not having to go through the consumptive time and cost of submitting the approval to HUD, and not having to work through the HOA board and property manager, makes condominium lending easier and therefore makes FHA purchases and refinances easier. The problem was HUD didn’t want to budge from their condominium lending requirements so the above mentioned entities brought the political pressure to bear in the form of sponsorship and passage of HR 3700. HR 3700 is a housing bill that includes changes to current HUD requirements and introduces condominium lending in associations that are not approved. Renamed “Single Unit Approval”, these changes will enable lenders to fund loans in unapproved associations once again. This is a big deal. It is estimated that over 100,000 condominium mortgages will fund under this new program in the first year. They don’t pass federal laws over my favorite color.

The program will begin with the same requirements as those for traditional HRAP/DELRAP FHA approval. Now while HUD has not published the lender requirements or the final rules, we do know several small differences will exist:

  1. Only condominiums with 5+ units are eligible for this program.
  2. Manufactured housing developments will not be eligible for this program.
  3. Only units in completed developments will qualify. This also includes units in phased developments where all declared phases are 100% complete.
  4. There is an established maximum possible units within any development that will be allowed to use this program. The range is set from 0-20%. Previously, Spot Approval was limited to 10%.
  5. Condominiums with adverse conditions are not eligible for this program (HUD has not specified what these conditions would be but could included previously rejected or withdrawn association, construction defect, environmental hazard, or fraudulent submission.
  6. Condominiums that are currently FHA approved are not eligible for the Single Unit Approval program.

Currently, only 9965 condominium associations are approved in the United States and its territories. There are estimated to be 170,000 condominium associations in the US. This is why the powers that be wanted the return of Spot Approval because the number of approved condominiums have dwindled from 24,000 to just 9965 today. Consequently, the number of FHA mortgages insured in condominiums has fallen to 32,000 in 2015 from over 100,000 in 2009.

Under Spot Approval then, and Single Unit Approval now, the condominium has to be eligible. Obviously, HUD would not change guidelines to make it easier to obtain FHA mortgages when they won’t be reviewing the condominium and its governing and financial documents before hand. FHA is an insurance fund and as such, is most concerned about risk to it.

And they should. Condominium associations are diabolical, complex organisms that have to abide by both federal and state condominium law, and frequently don’t. Run by volunteer boards, they do what they want, not what they should. Much like the government, they love to kick the financial can down the street because there is no one there to prevent it.

But this program is going to be a boon to FHA lenders, borrowers, buyer and sellers. Many seniors will be able to obtain a reverse mortgage under the new guidelines because it enables them to bypass the HOA board and property manager, who are the enemies of approval. I can’t tell you the number of seniors I’ve spoken with over the years who needed a reverse for medical treatment who were unable simply because the board didn’t want any of “those people”. Those people being FHA buyers. Nauseating.

HUD has not released the final rule and lender requirements for public comment, but are expected to in the next couple of months. Apparently they are busy with the recent MI reduction and Ben Carson’s installation. Many reverse lenders already are marketing to condominium associations in anticipation of the new rule change. So lenders and agents, prepare yourselves. A new untapped market is about to emerge with 16 million more units soon to be FHA eligible.

The Congressional Mandate of the return of Spot Approval is a good thing.

The return of Spot Approval is a very good development for condominium associations and the buyers, sellers, and refinancing owners who are affected. Spot Approval was eliminated on February 1, 2010, in favor of the requirement that an association obtain FHA approval from HUD, before an FHA insured mortgage could fund within the project. The powers that be like National Association of Realtors, the Mortgage Banking Association, the Reverse Mortgage industry, and every minority home buying organization, have been leaning on HUD for the last couple of years to bring the Spot Approval program back because its elimination has stifled condominium lending. Getting the condominium approved though HUD is a costly, time consuming process that is Byzantine to most professionals, and since HUD wasn’t budging, HR 3700 was proposed to implement that which HUD was unwilling to adopt.

It was risk management that prompted HUD to eliminate Spot Approval, because FHA market share and attendant risk was increasing. When FHA market share was only 2% prior to 2007, the need to worry about the risks posed by lending in unstable associations was small. HUD decided it would be a good idea to see the association, its governing documents and financials, before allowing anyone to use an FHA loan. This prudent decision coupled with others, has allowed for FHA to reach its 2% capital reserve requirement for loan losses, a mandate that is law. It had fallen below this threshold due to loan losses and insufficient premiums since the mortgage meltdown. FHA’s better financial health prompted them to recently reduce the monthly mortgage insurance paid by the borrower.

Now that the picture for the insurance fund is rosier, HUD can open the insurance purse strings to help seniors seeking a reverse mortgage, or the 80% of minorities that use an FHA loan when obtaining a mortgage. Last year, HUD only insured 26,000 mortgages in the less than 10,000 associations that are currently approved. This amounts to a little more than 2% of the 1.2 million residential mortgages they insured in 2015. With less than 10,000 associations approved, buyers have very few condominium choices. This fact is causing sellers values to drop, because it is economic law that if demand drops (no FHA buyers), and supply stays the same (listed property), then price falls. Economic law!
This loosening of regulations isn’t without some potential trap doors. HUD will need to be vigilant over the lenders funding these mortgages, to ensure they underwrite them consistent with long established HUD rules. In addition, they need to find quality control technologies that can independently verify the information that is being supplied to them. There is too much temptation for fraud to turn a blind eye to it. This is what got the insurance fund in trouble in the first place. Penalties and systems in place to protect the insurance fund and keep these very valuable government insurance programs alive.

How do short terms rentals allowed by associations affect their FHA approval?

There is a lot of confusion in the marketplace as to what the rules are as it relates to short term rentals for FHA approval. The bottom line is that if an association does in fact allow short-term rentals (minimum periods of less than thirty days), they are ineligible for FHA certification. These types of associations are referred to as “condotels”, and as such, are commercial enterprises and not considered residential in nature. HUD insures residential mortgages for owner occupants. It is very common for resort type areas (Florida, Hawaii) to allow short terms rentals because of the demand for vacation accommodations, and is one of the main reasons why there are so few FHA approved associations in these areas.

Where the waters get murky, is where the governing documents of the association are in conflict with the actual practice of the association. The developers of condominium associations included when they formed the associations, a myriad of differing language that caused HUD to issues the following waivers.

I. When the declaration (CC&R’s) states no minimum lease term, and neither the declaration or Rules and Regulations prohibit hotel leasing, then the board may prepare a letter on their letterhead, signed by the board president, attesting to the fact that there are no leases for a term of less than 30 days and that there is no hotel/transient leasing.

II. When the declaration (CC&R’s) states no minimum lease term and does not prohibit hotel leasing AND the Rules and Regulations DO state a minimum terms which is less than 30 days, the board must revise the rules and regulations so that the minimum lease term is 30 days or greater.
III. When the declaration (CC&R’s) states that any lease term of less than 30 days is permitted, the association must draft, approve, and record an amendment to the declaration (CC&R’s) which changes the lease term to 30 days or greater.

There is also a waiver in regards to lender or developer exceptions to leasing terms.

IV. When the declaration (CC&R’s) state that a lender or developer have any exception to the lease term, the board may prepare a letter on their letterhead, signed by the board president, attesting to the fact that there are no leases for a term of less than 30 days and that there is no hotel/transient leasing.

Associations must weigh the benefit of access to thirty percent of the current buyers by FHA certification, with the benefit to owners of the ability to rent their units for profit when the owners aren’t occupying them. As far as HUD certification is involved, no short term renting is allowed under any circumstances.

Here’s another example of how condo board of directors are failing their association.

Another completely misguided and ill informed board making erroneous decisions that will have a long lasting, negative impact on the association and its property values.
Here’s a letter we received from a condo association board member stating the reason why they’ve declined to pursue FHA Approval for their condo.

“After thoughtful consideration, the Board has decided against registering the D***** Plaza Association with the Federal Housing Administration. While it is understandable that some of the programs offered by the FHA could be beneficial, they do not outweigh the fees or restrictions that the FHA requires, and can impose.

The following list includes some of the items that were considered when making the decision.

Recent changes to FHA guidelines and certifications.
New requirements for reserve studies for new conversions.
New and risky certification for special assessments.
New delinquency rules.
New and very risky project certification to be signed by manager or association.
Effective date for some changes is immediate.
Expanded financial records now required.
Fidelity insurance changes required.
FHA rejection for association loans and special assessments.

Thank you for bringing this matter to our attention and for the opportunity to research it more fully.”

  1. There are no real changes to FHA guidelines and certifications. Ninety percent of the qualifying criteria are the same as they have been for decades.
  2. There are no new requirements for reserve studies for new conversions.
  3. This conclusion is just plain bizarre. Special assessments are very frowned upon by HUD and their existence makes an HOA ineligible in most situations. There is no certification, and the “risky” comment is dumbfounding.
  4. There are also no “new” delinquency rules. Delinquencies can be no more than 15% of the total units, and it has been this way for decades.
  5. New and “risky” project certification to be signed by manager or association. This board member is referring to the Appendix A, which is signed under penalty of a million dollar fine and thirty years in prison. It states that the information is true and correct. However, this penalty only covers “fraud”, not innocent mistakes. The association only has to worry about this certification is if they are committing fraud. Additionally, if the HOA retains a consultant firm to process the application, the sponsor firm signs the Appendix A, releasing the association for liability under this document.
  6. Effective date for some changes is immediate? What does this even mean? It is complete drivel.
  7. Expanded financials now required. No they’re not. The required financials are the same that have always been required.
  8. Fidelity bond insurance must equal the sum of three months assessment, plus whatever is held in reserve. This association obviously doesn’t have enough coverage, so a dishonest board member or property manager could conceivably empty the association’s bank account, and there wouldn’t be enough insurance to cover the losses, which would need to be made up by the owners.
  9. FHA will reject an association that has special loans and assessment, because it is an indication of a poorly run and managed association. The monthly HOA assessment should cover ALL of the costs of the association. Special assessments and loans are needed by associations that refuse to increase the monthly HOA dues, and therefore have to rely on one time special assessment, or loans, to cover the cost of maintenance of the property.

I don’t think it is difficult to sense my frustrations with these boards of directors. They’re misguided, ill informed, and have no clue as to the real issues involved with FHA approval. I have to deal with them on a daily basis, no easy task. They’re dogmatic and unwilling to listen to reason. And what is really a chunk of irony is it is these same board members who sat idly by and watched countless real estate speculators and buyers purchase within their association with zero down payment and no income verification! God forbid buyers now, using an FHA loan, are fully vetted from an income, credit, and down payment standpoint. It is going to be interesting to see what types of litigation come out of the actions of these boards, because as more homeowners become better informed, they are going to look to hold these boards accountable for the erroneous decisions they make.

Why is it that only 9 percent of associations in the country are FHA approved?

I was recently sent this from an owner in an association whose board considered the subject of FHA approval, its pros and cons, and published this to its members as their findings and voted unanimously not to pursue FHA approval. It would be laughable if it weren’t so common.

“FHA Building Approval”

The Board of Directors discussed at length the pro’s and cons of having the Association FHA approved. For the following reasons, it was their unanimous decision not to proceed with obtaining approval and this decision is within the discretion of the Board under the “Business Judgement Rule”:

  • The amount of fidelity Bond coverage will need to be increased by 250% to meet FHA requirements, at an additional unbudgeted cost to the Association.
  • The Capital Reserve Fund will need to be updated annually at a cost that is not in the Operating budget. Therefore, there will need to be a substantial increase in the maintenance fees in order to carry the additional funds that will be required to fund the Reserve Account per the updated study.
  • With FHA mortgages, unit owners may finance up to 97% of the value of their home. Therefore, there is minimal equity in the home and over time, can be over leveraged especially if current market values continue to decrease, as what has already happened with the economy.
  • The Association’s balance sheets and collections will be impaired by permitting purchasers to acquire units with up to 97% financing. More times than not, they will not remit their maintenance fees in a timely fashion.
  • No more than 30% of the units in the community can be subject to FHA mortgages.
  • Therefore, all of the aforementioned conditions would be put in place for the benefit of 54 units at the expense of 180 unit owners, knowing that 126 owners will not benefit from being FHA approved.”

Conclusion number one is accurate, in that the fidelity bond coverage would need to be increased to cover the sum of three months of the standard assessment, plus whatever is held in reserve. Fidelity bond coverage is extremely inexpensive to increase, something this particular board didn’t bother to investigate.

Conclusion number two is completely erroneous. No reserve study is necessary, provided that the association budgets 10% of the standard assessment to reserves.

Conclusion number three defies logic. The statement, “there is minimal equity in the home and over time, can be leveraged especially if current market values continue to decrease”, is nonsensical. The exact OPPOSITE is true, which is to say that the more values drop, the less leverage there is since the equity is declining, not appreciating. No one putting 3.5% down payment is going to be able to refinance any money out of the property in the foreseeable future, given current market conditions.

Conclusion number four not only is ridiculous; the statements contained therein likely violate a number of Federal and State housing discrimination statutes. The judgment that FHA borrowers, more times than not, will not remit their maintenance fee in a timely fashion is arbitrary, capricious, and completely unsupported by the facts, and evidences this boards obvious bias towards government insured borrowers.

Conclusion number five is also incorrect. Fifty percent of the units within an association are eligible for FHA financing, not thirty percent. This is called FHA concentration, and can be as high as 100%, on a case-by-case basis as decided by HUD.

As one can see, boards across the country are breaching their fiduciary duty owed to the association, when considering this most important issue of FHA approval and coming to conclusions that are factually incorrect and discriminatory in nature. I cannot understand how, in this market, an association can eliminate forty percent of the current buyers by voting down FHA approval. Unfortunately, this is a problem that plagues a large percentage of the associations across the country and will not change until these boards educate themselves and gather the facts about FHA approval and its market share.

Homeowners Associations Can No Longer Ignore FHA Approval

The screaming and cursing you hear in unit 404 isn’t coming from Mr. Armbrister’s television—Armbrister has just learned that another potential sale of his condominium unit fell through due to the buyer’s inability to obtain financing. In this case, the buyer wanted to purchase Armbrister’s condo unit with an FHA loan—Armbrister’s homeowners association, however, had neglected to obtain FHA approval.

FHA loans, which are mortgages insured by the Federal Housing Administration, accounted for a mere 1.7% of new mortgages as recently as 2006. Today, almost half of all new mortgages are FHA—yet there are still many misconceptions associated with their use and their benefits.

Due to the elimination of ‘spot approval’ in February 2010, an entire condominium development must now apply to the Department of Housing and Urban Development (HUD) and be granted FHA approval before someone can purchase or refinance a unit using an FHA loan. Before its elimination, spot approval allowed an FHA buyer or refinancer to conduct a transaction in a specific condominium unit located in an unapproved complex.

Management companies and homeowners associations constantly ask why their condominium developments should seek FHA approval. A recent survey of more than 12,000 home buyers conducted by the Home Buying Institute indicated that the vast majority of respondents (87%) planned to use an FHA loan for their purchase. Given the prevalence of FHA loans in today’s housing market, the simple answer is that unit sellers in an association without FHA approval are severely limiting the pool of potential buyers. Thanks to the law of supply and demand, fewer possible buyers mean units will often sit on the market for longer periods and sell for lower prices. Even non-sellers are affected as lower sales prices for neighboring units often result in lower appraised values for all units.

Why have we seen such a surge in FHA borrowing? First, the general unwillingness of today’s lenders to extend credit and an almost complete withdrawal of private capital from the home mortgage sector forced HUD and FHA to take action. They ultimately crafted policies to increase FHA availability in order to help stabilize the housing market. FHA loans encourage lenders to lend, assuring them that they will be paid back by the federal government in case of default.

Second, as many residential real estate agents know all too well, the sudden and inevitable collapse of the high-risk subprime mortgage industry left a tremendous void in the marketplace for those buyers that did not have the 20% downpayment typically required when obtaining a conventional loan. This void is nicely filled by FHA loans, which require as low as a 3.5% down payment.

Finally, the significant increase in the maximum FHA loan limits from $362,790 to $793,750, means that an FHA loan is now relevant and appropriate for a much greater percentage of home purchases and refinances than ever before.

In addition to the benefits discussed above, there are other features inherent to FHA loans that help explain their newfound popularity. Credit requirements are less stringent than is the case with conventional loans. Also, FHA loans are fully assumable, meaning that a seller with a current FHA loan can offer the financing and terms to a buyer during resale. Assumability will be a great benefit to a future seller when interest rates turn higher.

Despite FHA’s easier down payment and credit qualifying guidelines, associations should not fear that FHA loans are risky and real estate agents should feel comfortable suggesting them as an option to their clients. “Full documentation” requirements ensure borrowers are fully vetted for their ability to afford the property in question. With the required income and asset reporting demanded by FHA, foreclosure rates have been historically lower than for those with any other type of loan—a fact that should give homeowners associations peace of mind.

Associations and management companies should further investigate and consider all of the benefits that FHA loans provide. Real estate agents should be prepared to help their clients navigate the process, as it will only help increase sales in a tricky market.

Christopher Gardner is the Founder and President of FHA Pros, LLC. He may be reached at cgardner@fhaprosllc.com.