We are constantly asked, “What are the pros and cons of FHA condo approval?” But before we get to that, it’s important to clear up a few things about the FHA 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. They simply have lower down-payments because they are backed by the Federal Government.
People using FHA loans are not statistically more likely to default.
FHA Condo Approval is a privilege, not a right. Not all Associations will be eligible for FHA Condo Approval. Becoming FHA Approved simply means HUD has reviewed the Association and has determined they are financially sound, and meets a set of criteria.
FROM THE ATTORNEY
What HOA attorneys are saying about FHA Condo Approval
It is known that the FHA carefully vets any Condo project before approving, and this agency’s approval is tantamount to independent confirmation of adequate reserves, a minimally acceptable dues delinquency rate, acceptable owner-occupied ratio, reasonable bylaws, etc.
Obtaining FHA Condo Approval, which many condo communities don't qualify for, opens the door to a vastly wider prospective buyer pool. Just stating that a condo is FHA-approved is a great boost in the successful marketing of any unit.
Any savvy, well-capitalized conventional loan buyer would still take reassurance in a condo being FHA-approved. It is a doubt-eraser that would translate into sustainably higher property values across the board.
PROS OF FHA CONDO APPROVAL
FHA Condo Approval dramatically increases the pool of potential buyers
First and foremost, FHA Condo Approval opens up a sea of buyers. Statistics show that most first time homebuyers intend to use an FHA Loan. If your community does not have FHA condo approval, you potentially limit the buying pool to a much smaller pool 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 Values
Secondly, 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 within the community.
Furthermore, 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 cannot 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 to 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.
Fewer Renters in the Community
Generally speaking, buyers who use FHA loans are more likely to reside within the unit, and not rent it out. Conversely, condominiums 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.
Going through the FHA Condo Approval process gives homeowners the sense that the Board cares about the community and wants it to thrive. By avoiding the approval process, it will hamper unit owners when they go to sell, refinance, or reverse their units.
Finally, Board 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.
CONS OF FHA CONDO APPROVAL
At this time, experts agree that there are no “cons” to being FHA Certified. However, there are several misconceptions about FHA Condo Approval. Remember, chances are, your community was FHA 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. For this reason, there are fewer than 10,000 communities nationwide that can boast FHA Condo Approval.
MISCONCEPTIONS SURROUNDING 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.
The banks impose a set of standards for a borrower to use an FHA or VA Insured Mortgage. 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 Loans have lower down payments, so they are more likely to default – FALSE
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 and avoid all foreclosures. Many conventional lenders allow down payments equally as low as FHA, including military veterans using a VA loan with as little as 0% down.
Not all FHA borrowers are only putting only 3.5% down. Some FHA borrowers need FHA loans for other reasons, and will put down 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 or visit 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 guidelines.
FHA Loans caused the housing crisis – FALSE
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 strictly 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 too expensive – FALSE
Well-managed and financially stable communities have no trouble becoming FHA Approved. The cost for FHA and VA Approval 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 $895 per submission or $795 for FHA renewals.
The above article about the pros and cons of FHA Condo Approval was written by FHA Review. Use of this article for publishing purposes must be approved by FHA Review.