Significant changes in the real estate financial markets have occurred in recent months which suggest the need for Communities to seek certification from the Department of Housing and Urban Development (HUD) for mortgage loans insured by the Federal Housing Administration (FHA). This issue is of most concern to condominiums and townhouse communities. Historically, FHA insured loans were a stigma to many boards. This mind-set should be re-examined in current economic conditions.
Prior to February 1, 2010, “spot approvals” were available for individual unit sales. Spot approvals were discontinued as of February 1, 2010, and only properties in previously certified communities will qualify for FHA backed financing.
Statistics indicate that more than 50 percent of new loans are being backed by the FHA. If a community does not have the pre-certification in place, this portion of the purchasing market will not be available to the sellers in the community. As such, obtaining the HUD approval will tend to ensure a healthy market for buyers and sellers. Readily available financing leads to more potential buyers, and the possibility of more and higher sales, as well as unit values. This certification also allows that associations and management companies can cover their compliance and re-approval costs through charging a reasonable transfer fee to buyers using FHA-insured loans, with the appropriate authority in their governing documents.
In March 2010, Florida had the fourth highest foreclosure rate in the U.S. according to RealtyTrac and this is of obvious concern to community associations. Associations can allay some of these concerns by receiving HUD approval, which encourages buyers to apply for FHA loans. The foreclosure rate on FHA loans is one (1%) percent, as opposed to five (5%) percent for non-FHA loans. Among the reasons for this disparity is because the FHA requires the owner to occupy the property and provide full income documentation in order to qualify.
Vacancies are also a problem affecting many associations in South Florida. Receiving FHA certification will not solve the problem, but will likely assist associations in filling these vacant units. Currently, interest rates on loans for condominium units are lower on an FHA loan due to rate adjustments that lenders have made. FHA loans are also the only fully assumable loan product on the market. With lower interest rates, more homebuyers can afford a new home. In addition, the selling price will often be higher because of the financing that can be offered with the property.
FHA loans have also doubled the limits of available financing on a property (to over $700,000) and will be one of the most secure sources of financing for homebuyers. Due to the dramatic increase in lending, the HUD is becoming more stringent with its loan guidelines to decrease loan risk and increase quality.
In the long run, it is anticipated that associations will benefit from being FHA certified. Property values may increase due to improved market conditions and decreased vacancy. However, it is solely up to the homebuyer to decide what loan program they should use. It is an important financial decision that should not be taken lightly and should be made only after practicing due diligence.
Boards are encouraged to investigate whether their community meets the qualification requirements to obtain FHA certification as soon as possible. Guidelines have been relaxed for 2010 and are anticipated to tighten in 2011. Certification is limited to a two-year period and will need to be re-certified periodically. Please contact us with further questions on this important topic.