Pros, Cons and Misconceptions of FHA Condo Approval in 2016
We are consistantly asked, “What are the pros and cons surrounding FHA condo approval?” But before we get to that, its important to clear up a few things about the FHA and and their role in the housing market:
Despite popular belief, here are some TRUE facts:
- The FHA is not a Lender. They provide mortgage insurance.
- FHA loans did not cause the housing crisis.
- FHA insured loans are not related to Section 8 or low income housing.
- People using FHA loans are not statistically more likely to default.
- FHA approval is a privilege, not a right. Not all association’s will be eligible for FHA approval.
PROS, CONS, & MISCONCEPTIONS SURROUNDING FHA CONDO APPROVAL
What are the PROS of being an FHA Approved Condominium?
FHA condo approval dramatically increases the pool of potential buyers
Statistics show that approximately 60% of new homebuyers intend to use an FHA Loan. If your community does not have FHA condo approval, you potentially limit the buying pool to only 40% of homebuyers.
NOTE: These are “regular” buyers – an FHA loan is not associated with low-income HUD programs, such as Section 8. In some counties, an FHA insured loan can reach amounts of $800,000.00 or more. Since the recession, most American buyers are using FHA insured loans, and this will be the trend for years to come.
Increased Home Value
FHA approved Condos have a larger pool of prospective buyers, therefore increasing competition and demand for the product. This can result in higher purchase prices and an increase in market value. This will ultimately increase the value of all units throughout the community.
FHA Certification is necessary to get a Reverse Mortgage (HECM). Many owners use these types of loans as a financial planning tool and cannot stay in their units without this type of financing. Without FHA condo approval, unit owners can not obtain a reverse mortgage.
FHA Loans are Assumable
This means that in the future, an FHA Loan can be assumed (including the interest rate) by a new buyer. With interest rates at an all-time low, this can be a very valuable asset to an HOA community.
Realtors are more likely to bring their clients FHA and VA Approved communities. Units with these approvals are easier to sell and most often sell for higher prices than similar condo associations that are not approved.
Going through the FHA condo approval process gives your Homeowners the sense that you as a Board care about the community and want it to thrive. By avoiding the approval process, it will hamper unit owners when they go to sell, refinance, or reverse their units.
Fewer Renters in the CommunityGenerally speaking, Buyers who use FHA loans are more likely to reside within the unit, and not rent it out. Conversely, communities without FHA approval will attract buyers that can make large down payments for conventional financing. These buyers are usually investors who will rent out the property for a profit.
Fiduciary DutyBoard Members and Property Managers are expected to maintain property values in their communities. Several HOA attorneys advise that it is the fiduciary duty of the condo Board to apply for FHA condo approval to maintain or increase property values for residents.
What are the cons of FHA Condo Approval?
At this time, experts agree that there are no “cons” to being FHA Certified. However there are sever misconceptions about FHA Condo Approval. Remember, chances are, your community was certified when it was first developed. Most communities in the US are currently seeking FHA eligibility, but may not meet the strict FHA guidelines, and will not qualify.
Misconceptions regarding FHA Condo Approval:
FHA and VA are lenders. – FALSE
The FHA and VA provide mortgage insurance to banks, credit unions, and other lenders. In turn, these lenders make loans that meet insurance standards. If the loan defaults, the FHA or VA reimburses the lenders for a portion. They do not “approve buyers.” This is still done by the lender/bank, just like conventional loans.
To use an FHA or VA Insured Mortgage, there is a minimum set of standards that must be met by a potential mortgagee. However, each lender enforces additional requirements based on their own best practice. These requirements include mortgage score, credit history, bankruptcy and foreclosure/short sale history, and employment verification.
Being FHA Certified will bring in “low-income” buyers – FALSE
This is false. FHA Condo approval is completely unrelated to affordable housing programs. The FHA can insure loans upwards of $800,000.00 in some areas. Since the recession, most american buyers are using FHA insured loans, and this will be the trend for years to come.
FHA and Loans have lower down payments, so they are more likely to default – FALSE
No. There are many different factors that come into play during a foreclosure. If down payments were the key to borrower default, banks and lenders would be able to predict all foreclosures. Many conventional lenders allow down payments equally as low as FHA.
Not all FHA borrowers are only putting only 3.5% down. Some FHA borrowers need FHA loans for other reasons, and will put significantly larger amounts as a down payment. The lower down payment is only an option if your credit score is high enough. If a potential buyer has a lower credit score, the minimum down payment goes up to a minimum of 10%.
If we become FHA Certified, the FHA will have control over our community – FALSE
The FHA will not have any “control” over the governing of the community. An FHA certified community has no obligation to maintain its certification, and the FHA does not monitor the association. When a condominium is placed on the FHA connection list, the FHA is simply certifying that the Association meets requirements set forth in the FHA Handbook.
FHA Loans caused the housing crisis – FALSE
No. The FHA does not lend money. It insures loans that meet their standards. Sub-prime loans are what caused the mortgage crisis. FHA Insured loans are a big part of how the housing market came back. The following is what “caused” the foreclosures and defaults stemming from the 2008 real estate fall-out:
- Sub-Prime Mortgages
- Interest-Only Payment Options
- Negative Amortization Loans
- Housing Speculators
- Faulty Appraisals
- Limited Underwriting
The FHA requires a minimum percentage of units to be FHA Loans – FALSE
No. In fact, the FHA limits the amount of FHA insured loans within condominium associations. The FHA cannot require any association (regardless of FHA Certification status) to carry a minimum amount of FHA Loans.
The guidelines are too strict and it’s cost prohibitive – FALSE
Well-managed and financially stable communities have no trouble becoming FHA approved. The cost has dropped dramatically since 2010. When the guidelines initially changed, Attorneys were charging upwards of $5,000 to review the documents. FHA Submission companies like FHA Review are able to streamline the process and charge significantly less. FHA Review charges a flat rate of $850 per submission.