Buying a condominium is getting more difficult for anyone who wants to put down only 3.5 percent and have the government insure their mortgage. The issue isn’t just the borrower’s financial qualifications. It’s the building’s, and plenty of condos no longer get a thumbs-up from the Federal Housing Administration.
Since Feb. 1, 2010, condo buyers haven’t been able to secure unit-by-unit “spot” approval for FHA-backed mortgages if an entire building was not certified. Instead, the federal government set criteria to determine the financial viability of an entire building before deeming the project as FHA-approved, even if it had previously been certified. An approval lasts two years. The number of rejected buildings is adding up, due to bad paperwork and bad balance sheets, as an increasing number of condo associations struggle with rentals, short sales and foreclosures. It is jeopardizing the plans of condo sellers who rely on the FHA’s stamp of approval as a marketing tool and condo buyers who either want or need an FHA-approved building.
The effects of those rejected buildings are likely to linger, particularly if more stringent down payment requirements take effect for home buyers, and could hamper any recovery of the housing market. Many times, particularly in smaller buildings, it is a real estate agent or lender that informs an association that its certification has expired. In addition to not knowing about the process, a lack of knowledge of the rules and the many gray areas within them is compounding issues for condo buildings.
Many buildings are denied simply for missing or incomplete paperwork, which has led to the creation of a cottage industry of companies and attorneys that help shepherd associations through the process. Among the specifics that the FHA looks at is that a building is 50 percent owner occupied, that no more than 10 percent of units are owned by one investor or entity, that no more than 15 percent of the units are 30 days past due on their monthly assessments, and that at least 10 percent of the association budget be set aside for capital expenditures and deferred maintenance. But some of those rules also come with a little wiggle room. Unless we can get the buildings occupied, they will not be able to be FHA approved. It’s a never ending circle.
The FHA also looks at special assessments and pending litigation, two areas that can raise red flags. But in the meantime, associations continue to grapple with the rules. Some associations are deciding that the effort and the expenses tied to the application process, which can run into the thousands of dollars, aren’t worth the payoff and are letting their certifications lapse. In some instances, that position reflects a bias against what are thought to be lower-caliber buyers who need the FHA’s backing.
Many in the housing industry say that position is short-sighted, given consumer demand for FHA-backed mortgages.