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New FHA Guidelines Could Change the Condo Market Forever

Date:July 21, 2009 | Author:Keane Ng | Category:FHA Loans

UPDATE

HUD has extended the spot check deadline a 3rd time and has changed the warranty guidelines. See Part II of this blog here.

Are you condo owner or prospective condo buyer? Then you need to pay attention to some recent changes HUD (Department of Urban Housing and Development) is making that affects condominiums.

In the past, you only needed to satisfy one of the following two criteria’s to finance a condo unit using FHA financing.

1.) The Condo Project has a FHA warranty

- This requires the Homeowners Association of the condominium project to apply and receive a warranty on the project from the HUD.

2.) The unit must pass a questionnaire called a “Spot Check” done on an individual basis

HUD just released an announcement that they will be changing the guidelines which includes the removal of “Spot Check” approvals which means you will only be able to get a FHA loan on a condo if the project has a warranty. (Mortgage Letter 2009-19).

FHA loans now represent more than 25% of all home purchases. If you are selling a condo in a complex that does not have a FHA warranty, you are eliminating 25% of the buyers today. As our current real estate market has shown that when the ability to obtain financing for a property becomes more difficult, values drop.
WHAT THIS MEANS TO YOU IF YOU’RE A CONDO BUYER

Whether you’re looking to buy using FHA financing or not, this should still affect your buying decision. You don’t want to buy a property that will be more difficult sell down the road. If you find a condo that does not have a FHA warranty and you really want to buy it, know that October 1^st is the date the new guidelines go in affect. Also, many lenders will adopt this policy prior to this date, so be sure to check your lender. If you do buy using the “Spot Check” approval now, I would recommend you actively speak to the homeowners association about making the property FHA warrantable immediately after you close on your purchase.

WHAT THIS MEANS TO YOU IF YOU’RE A CONDO OWNER

Check immediately to see if your condo has a FHA warranty. If it has a FHA warranty, you’re good! If it is not a FHA warrantable complex, speak to the Homeowners Association immediately about getting the complex FHA warrantable. The key is to get your complex a FHA warranty PRIOR to the October 1^st date. Keep in mind that the turn times to get a warranty will be based highly on the amount of submissions HUD receives. Everybody will likely begin the process after they realize how important this is. The same thing happened in 2008 when non-FHA lenders realized the importance of being a FHA lender and FHA received a wave of applications and submissions. Try to be ahead of the curve.

IS THIS THE ONLY NEW CHANGE?

I’m happy to say that even though this change could potentially be extremely damaging to condo values, there are some positive changes on the 2009-19 HUD letter.

1.) Direct Endorsement Lenders can approve a project

a. This means that a FHA lender can actually do the warranty process for HUD. This is great if your lender is a DE (Direct Endorsement) lender as they can approve the entire project then provide you the financing to close

2.) Site Condominiums will not require a Condominium Project approval

a. Site Condos are single family detached dwellings. These will be looked at almost identically like a standard Single Family Residence to the FHA lender.

3.) Refinancing a condo that’s not warrantable that already has a FHA loan does not require a warranty when refinanced to another FHA lender

4.) No Project Approval is needed for buying a HUD foreclosure condo

UPDATE

Here is a link to HUD’s website to check if a condo is approved

One tip, don’t enter the project’s name. The name is not always saved on HUD’s website correctly. Enter your zip code and look for your project in alphabetical order.

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Responses (0)

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Keane 10:43 PM - Aug 31,2009

Here is a link to HUD’s website where you can search condominiums to see if they’re FHA approved.

https://entp.hud.gov/idapp/html/condlook.cfm
Olen Soifer 11:15 AM - Sep 17,2009

As a mortgage broker and member of a condo association board, this blog comment is part of what I am writing to our Board and management staff to counter an unfounded rumor started by a real estate broker…which could have started a riot in our community.

This is an example of what can happen when someone spreads a rumor in a field in which that are not familiar. My best advice is: Don’t take medical advice from your lawyer or legal advice from your barber or lending advice from your real estate broker (unless they are also a lender)!

Last night, an owner and Realtor freaked out our members and our Board of Director by incorrectly reporting the content of this blog post.

First of all, they implied that the post, itself, was an official FHA communication.

Second, not being lenders and not being familiar with who receives FHA Mortgagee Letters automatically, they implied that the association board was at fault because we hadn’t read the letter…on the assumption that we should have been sent it, automatically, by FHA.

Third, not being familiar with the FHA approval process, they misread the blog and/or the letter (09-19). The rumor-mongers implied that our association was, effective September 30, not going to be eligible for FHA mortgages.

Unfortunately, these people were wrong. The important aspect of ML 09-19 is the elimination of spot approvals by FHA and transfer of the spot approval process to Direct Endorsement lenders. Our association is a warranted project and has been so for 30-plus years. Spot approvals are not required for our association either before or after the effective date of ML09-19.

Yes, condominium questionnaires are still required by Fannie Mae and most lenders, but that is a standard part of condominium loan approvals. Yes, the associaction must still verify certain things, such as that there is a minimum of 50% owner-occupants.

But Mortgagee Letter 09-19 does not eliminate our FHA warranteed status under some blanket rule change or change that specifically directed at our community.

Again, I urge you to get correct information and an appropriate interpretation from a qualified and knowledgeable expert before jumping to conclusions and “losing your mind”.
Keane 11:27 AM - Sep 17,2009

Olen,

That is VERY unfortunate! I’m sorry to hear about the grief you went through.

You’re absolutely right. Warrented condos are fine. In fact, that puts you at a distinct advantage over non-warranted condos because many projects will let not be proactive until long after October 1st has passed.

To help clarify for others reading, if your project ALREADY is warranted, you’re good. This post was to help motivate people to apply for a warranty if they do not have one.

Please use your comment as well as my reply to help ease the minds of your association board.

Keane
Keane Ng 3:16 PM - Sep 24,2009

Please note the update at the top of this post. The FHA spot check date has moved to November 2nd.
Keane Ng 10:19 PM - Oct 21,2009

Another update. Supposedly this date has been moved again to December 7th. Still waiting to get an online reference that proves this to be true, but it’s been broadcasted on several blogs. I’ll update with a link once I find something official
Wallace Eldridge 5:45 AM - Jul 11,2010

You state that no project approval is needed for buying a HUD foreclosure condo. What section(s) of the Code of Federal Regulations provide for that exception? What is the citation (refernce)for that section in the Code? It makes sense that the Feds want to encourage sales of their foreclosed properties, so what do I tell my realtor who says I can’t get condo financing?
leah 10:05 PM - Jan 13,2011

I have a question about owner occupancy. our building is currently FHA approved but within the last 6 months we have out of 12 units… three rentals, two related party occupancies (owner lives elsewhere and relative lives in the unit) and two additional owners that want to rent their unit so they can buy or occupy other properties and one vacant unit. This faces or building with potential of 8 out of 12 units being occupied by someone other than the owner. If the related party occupations are considered owner occupied then we could breather a little easier on the lender front.