FHA Condo Financing: Still a Positive for Potential Buyers

Andrew Fortin

FHA condominium approvals (in their current form) emerged in the months following the housing crisis of 2008. It’s hard to believe that took place over 10 years ago, but because of the most challenging housing crisis since the great depression, the process for which condominium associations get approved for FHA changed significantly and lead to a host of other benefits for condominium associations that undertake the effort to get approved. Understanding the impacts of these changes, where FHA is headed in 2019, and the importance of FHA approval are key considerations for condominium association boards and managers as we head into 2019.

What Changed?

The biggest change that occurred in the post-2008 housing finance world is that FHA condominium lending went from a niche service to a more widespread tool for first time homebuyers. This is because during the height of the housing crisis, FHA was one of the few lenders that established evaluation criteria to assess the financial health of condominium associations and was willing to take on condo loans during the darkest days of the financial crisis. As a result, FHA became a key player in condominium financing. In addition, the criteria used by FHA to evaluate and qualify condominium associations became a badge of honor in the marketplace. For buyers and real estate agents, an FHA approved condominium association was seen as a sign that the association was well run. So even if buyers weren’t using FHA condominium financing, the approval has become a selling point for all buyers.

But the biggest change that occurred was that the burden of obtaining FHA approval now falls on condominium boards, rather than on lenders or potential buyers. That key change still eludes some boards. Under the current process, the entire association needs to be approved by FHA prior to any FHA-backed mortgage being issued for any unit in the association. In the past, a qualified buyer would work with their lender to get FHA approval. Now with the burden on the association, it’s up to the board to get approval in place. The process is not hard, but it does take a bit of time, so waiting until a unit owner has an interested FHA buyer usually means a lost sale and an angry resident.

Why is FHA Condo Approval Still Important?

As noted, prior to 2008, few condominium boards paid much attention to FHA financing. Only about 5% of condominium loans were to FHA-backed buyers. But in the years since, FHA-backed condominium mortgages peaked at close to 30% in some markets. As noted above, due to their lending requirements, FHA approval tells buyers your community is governed well. FHA requires that an approved community have less than 15% of units 60 days delinquent, that they have an adequate budget to maintain the common elements, that reserves are funded and that appropriate insurance policies to protect association assets are in place.

For boards who are interested in FHA approval, the process is fairly straight forward, but somewhat detailed. FHA requires that a project approval meet certain criteria by submitting an application and supporting documentation in order to obtain approval. FHA examines numerous factors prior to issuing a project approval. These include:

Determination of adequate budget and reserve funding
No more than 15% of units 60 days late in assessments
The project has no more than 25% commercial space
Fidelity, flood and other insurance policies are in place

FHA approval is seen as critical enough that some states, like California and Virginia, require the association to disclose the association’s FHA approval status for all potential purchasers. So, for associations that want to ensure that units are marketable to the broadest range of buyers, and who want to show non-FHA buyers that their association meets the FHA guidelines, obtaining FHA approval should be a must do item on their list for 2019.

Notes on the Shutdown:

At the time of this writing, the federal government shutdown is impacting FHA. What this means is that for the extent of the shutdown, no FHA applications are being reviewed. However, applications are still being accepted, and will likely be processed in the order they were received when the shutdown finally ends. So, it’s still a good idea to move forward on the process despite the challenges in Washington.

How to Sign Up:

Associa-managed condominium communities can take advantage of our FHA Assist service to obtain FHA approval for your association. Our professionals will work with your community manager or board to assemble your FHA approval submission, work with FHA to address any deficiencies, track approval and provide you with a recertification notice before the two year approval expires.

To find out more, ask you community manager or send an inquiry to Natalie Ayers at Nayers@associaonline.com.