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.
PROS OF FHA CONDO APPROVAL
FHA Condo Approval dramatically increases the pool of potential buyers
Increased Home Values
FHA Approved Condos have a wider pool of potential buyers, leading to increased competition and demand for these properties. This can drive up purchase prices and market value, ultimately boosting the value of all units in the community.
FHA Certification is required to obtain a Reverse Mortgage (HECM). Many owners use these loans as a financial planning tool, and without FHA condo approval, they won’t be able to access this type of financing. Don’t let your unit owners miss out on this valuable opportunity.
FHA Loans are Assumable
FHA loans are assumable, which means that a new buyer can take over the loan, including the interest rate, in the future. For units purchased with low interest rates, this can be a valuable asset for an HOA community.
Realtors are more likely to show properties in FHA and VA Approved communities to their clients. These properties are easier to sell and often fetch higher prices than comparable unapproved associations. Don’t miss out on this opportunity to attract more buyers and get a better price for your units
Fewer Renters in the Community
FHA-approved units are more likely to be occupied by owner-residents, rather than rented out. On the other hand, unapproved condos tend to attract buyers with large down payments who are looking to invest and rent out the property for a profit. Choose FHA approval to attract owner-residents and create a more stable community
The FHA Condo Approval process shows homeowners that the Board cares about the community and wants it to succeed. Skipping this step can make it harder for unit owners to sell, refinance, or get a reverse mortgage on their units. Don’t miss out on this opportunity to show your commitment to your community and make it easier for owners to access these valuable financial tools.
As Board Members and Property Managers, it’s your responsibility to maintain and enhance property values in your community. Many HOA attorneys believe that it’s your fiduciary duty to apply for FHA condo approval in order to achieve this goal. its important to fulfill your duty and improve your community’s property values.
CONS OF FHA CONDO APPROVAL
Experts agree that there are no disadvantages to being FHA Certified. However, some people have misconceptions about FHA Condo Approval. It’s likely that your community was FHA certified when it was first built. Fewer than 10,000 communities in the US currently meet the strict FHA guidelines and have FHA Condo Approval. Many more are seeking FHA eligibility but may not qualify.
Most communities in the US are currently seeking FHA eligibility, but may not meet the strict FHA guidelines, and will not qualify. There are fewer than 10,000 communities nationwide that can boast FHA Condo Approval.
MISCONCEPTIONS SURROUNDING FHA CONDO APPROVAL
Being FHA Certified will bring in “low-income” buyers – FALSE
- This is one of the most common misconceptions about FHA Approval. The truth is:
- FHA Condo approval is not related to affordable housing programs.
- The FHA can insure loans over $1,000,000 in some areas.
- Since the recession, most American buyers have been using FHA insured loans.
- This trend is expected to continue in the coming years, especially with the current volatile market.
FHA Loans have lower down payments, so they are more likely to default – FALSE
- Foreclosure Factors
- There are many different factors that can contribute to a foreclosure.
- Down payments are not the only factor that can predict borrower default.
- Banks and lenders cannot always predict and avoid foreclosures.
- Low Down Payment Options
- Many conventional lenders offer low down payment options, including VA loans with 0% down for military veterans.
- FHA loans also allow for low down payments.
- FHA Down Payment Options
- Not all FHA borrowers only put down 3.5%.
- Some FHA borrowers may put down a larger amount if they need the loan for other reasons.
- The minimum down payment for borrowers with a high credit score is 3.5%.
- Credit Score and Down Payment
- If a potential buyer has a lower credit score, the minimum down payment goes up to 10%.
- The minimum down payment is only an option if the borrower’s credit score is high enough.
If we become FHA Certified, the FHA will have control over our community – FALSE
- FHA Certification and Community Governance
- The FHA does not have any control over the governance of a community.
- An FHA certified community is not obligated to maintain its certification.
- The FHA does not monitor or visit the association.
- FHA Connection List
- When a condominium is placed on the FHA connection list, it means that the association meets the requirements set forth in the FHA guidelines.
- The FHA is simply certifying that the association meets these requirements.
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.
FHA and VA are Lenders - FALSE
- FHA and VA Mortgage Insurance actually works like this:
- The FHA and VA provide mortgage insurance to banks and other lenders.
- These lenders use the insurance to make loans that meet certain standards.
- If the loan defaults, the FHA or VA reimburses the lender for a portion of the loss.
- Lender Requirements for FHA and VA Loans
- Banks and lenders have their own requirements for borrowers who want to use an FHA or VA insured mortgage.
- These requirements may include a minimum credit score, a history of bankruptcy or foreclosure, and employment verification.
- Each lender may have additional requirements based on their own best practices.
The guidelines are too strict and it’s too expensive – FALSE
- FHA Approval for Well-Managed Communities
- Financially stable and well-managed communities have an easier time getting FHA Approval.
- The cost of FHA and VA Approval has dropped significantly since 2010.
- FHA Review and Submission Costs
- Attorneys used to charge upwards of $5,000 to review documents for FHA Approval.
- FHA Review is a company that streamlines the process and charges less.
- FHA Review offers a flat rate of $895 per submission or $795 for 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.
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.