CHICAGO REAL ESTATE PLUS

FHA financing for condominiums can be challenging…but not impossible.   FHA stands for Federal Housing Administration and it is a United States government agency.   The FHA was created in 1934 during the great depression and was part of the restructuring of the banking system. The FHA does not provide loans but simply insures them.   Wikipedia gives more details on the history and basics of FHA loans.

The purpose of this post is to outline the special FHA requirements for condominiums.   The first thing any condo association should know is that at this time they will not qualify for FHA financing if they have a right-of-first-refusal.   Changing this requirement is currently being debated…but personally I would not hold my breath on anything happening with that anytime soon.   Meanwhile other requirements for condos to meet FHA requirements follow: (provided by Larry Steinway of Baird & Warner Financial Services)

It is imperative that Condominium Associations understand and follow these new guidelines (as of February 1, 2010) for their members and prospective purchasers in order to be eligible for these loans.

FHA INSURED LOANS

Though the FHA does not make loans directly, it insures loans made by private lenders and is the largest government insurer of mortgages in the world. While during better economic times the percentage of loans which were FHA insured were minimal, recent data suggests that approximately 30% of the current loans being issued nationwide are FHA loans.

As of February 1, 2010, Condominium Associations need full project approval through the FHA prior to an FHA insured loan being issued. Once obtained, the FHA approval is good for two years. The approval is obtained by submitting the required application and documentation through your local HUD office, and there are companies which will process those applications for you. The project approval process is only one step and it is incumbent on the Association to compile the necessary application documents to be submitted to HUD. It is estimated to be two to four weeks for the approval process. After February 1, 2010, unless a Condominium is on the approved list by the FHA, insured loans may not be funded in such Condominiums.

Eligibility requirements for obtaining FHA insured loans differ for new and existing Condominiums. Requirements for existing Condominiums include:
¢                 The Association must have a completed questionnaire
¢                 At least 50% of the units must be owner occupied and 100% of the common facilities be completed
¢                 FHA will only insure 50% of loans in a particular Condominium until December 31, 2010. Then it will decrease its ratio to 30%
¢                 The insurance premiums and deductibles of the Association must be contained within the Association budget
¢                 Fidelity coverage must be obtained in an amount equal to three (3) months aggregate assessments plus reserve funds
¢                 The Association’s insurance must cover 100% of the replacement cost exclusive of land
¢                 Not more than 15% of the units may be delinquent more than thirty (30) days on the payment of their assessments
¢                 There may not be any litigation, other than assessment collection, but the FHA will entertain exemptions for this issue on a case by case basis
¢                 Condominium hotels, timeshares and projects not deemed to be used primarily for residential purposes are not eligible for FHA insured loans

Associations should be proactive and take the initiative in obtaining the necessary FHA approval, rather than wait for the initial buyer and seller to potentially lose a sale over such a delay. Associations should also account for the cost of the project approval to be several thousand dollars depending upon the approval company and whether issues come up during the project approval process.

The reason a condo association would want to be FHA approved is to increase the number of buyers that would qualify to buy in the building. FHA loan requirements are more lenient than conventional loan requirements.   Watch for more information on this in the near future. If you live in a condominium building, you might inquire of your manager about your FHA status.     If you would like to pursue getting your building approved, feel free to email or call 312.981.2315.

You might be interested in these posts:

FHA Loans:   Basic Facts

Fannie Mae and Freddie Mac – Who are they?