Blog post by David Swedelson, Senior Partner at SwedelsonGottlieb, Condo lawyer and HOA attorney
An interesting article on condos and FHA-backed financing is making the rounds on the Internet. Originally published in the Chicago Tribune Buying and appearing in the February 13th edition of the LA Times, the article (follow this link) states that buying a condominium is getting trickier for anyone who wants to put down only 3.5 percent and have the government insure their mortgage.
The article suggests that the issue isn’t just the borrower’s financial wherewithal; “It’s the building’s, and plenty of condos no longer get a thumbs-up from the Federal Housing Administration.”
As the article points out (and as you have likely heard), since Feb. 1, 2010, condo buyers haven’t been able to secure unit-by-unit “spot” approval for FHA-backed mortgages if an entire association 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 article points out that the number of rejected condo associations 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 article states that for the first nine months of 2011, the FHA’s share of the overall home-purchase market was 37.4 percent nationally, an interesting statistic. The article also suggests that 38 percent of condominium communities that have gone through the certification process have been rejected by the FHA.
Considering FHA certification? The article states that “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.”
“The FHA also looks at special assessments and pending litigation, two areas that can raise red flags.”
What the article does not state is that community associations are NOT required to be certified. But it does point out that “[s]ome 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.”
And as we have reported previously, CAI is in the middle of this issue. “The Community Associations Institute (CAI) believes the FHA’s requirements are having a “chilling” effect on the market, and the trade group has asked for flexibility in the guidelines.”
“When it comes to the condo market, that is the gateway to affordable housing, and FHA should play a critical role in that,” said Andrew Fortin, a vice president at the trade group.