The Seattle Condo Blog

Update: Since this post was originally published, the implementation date was postponed from November 2nd to December 7th. Some additional changes and clarifications are expected.

Implementation has been postponed, again, to February 1, 2010. Additionally, some of the changes have been altered since they were first proposed.

FHA has revised its guidelines for condominium mortgages. The new guidelines will take effect with all case numbers assigned on and after February 1, 2010 December 7, 2009 November 2, 2009. (Note: the guidelines were initially scheduled to take effect on October 1, 2009 but have been delayed to February 1st.)

FHA is implementing a new approval process for condominium projects, and with it, the elimination of the “spot approval” process. Spot approvals were used by lenders to qualify an individual buyer’s condo purchase using FHA where the condo project was not previously approved by HUD/FHA. In its place is a new streamlined process, which may affect buyers, sellers/developers and homeowner associations.

With FHA loans becoming more prevalent with its low down payment and flexible eligibility requirements, condo buyers, sellers and their HOAs should keep these changes in mind. For instance, if an HOA has not yet conducted a reserve study, they will now need to do so if owners wish to sell to an FHA buyer, who are becoming an increasingly larger segment of home buyers.

Owner occupancy:
+ Prior to February 1st: 51% of the units must be owner occupied.
+ As of February 1st: 50% must be owner occupied or sold to owners who intend to reside in the unit.

Single owner status:
+ Prior to February 1st: No single entity may own more than 10% of the units.
+ As of February 1st: No more than 10% may be owned by one investor. This applies to builders that subsequently rent vacant and unsold units. This will not only affect the developer who intends to sell their unsold units, but also to existing unit owners in the project. For 2 or 3-unit buildings, no single entity may own more than one unit.

FHA Concentration:
+ Prior to February 1st: For projects over 30 units, no more than 10% may be insured by FHA; for projects with less than 30 units, no more than 20% may be insured by FHA.
+ As of February 1st: For projects with 4 or more units, no more than 50% (temporarily increased through 2011) 30% may be insured by FHA; for 2 or 3 unit projects, only one may be insured with FHA. The change increases the FHA concentration allowing for a greater number of FHA buyers/owners.

Reserve Study:
+ Prior to February 1st: No requirement. However, Washington State law requires homeowner associations to conduct reserve studies, though there is no enforcement provision.
+ As of February 1st: FHA will require that a current reserve study must be performed to assure adequate funds, which must not be more than 12 months old. This is a good change as it’ll incent the HOA to conduct a reserve study.

Insurance:
+ Prior to February 1st: The HOA must provide evidence of appropriate hazard, liability and flood insurance.
+ As of February 1st: The project must be covered by hazard and liability insured, and were applicable, flood insurance.

Other changes include:

Arrears: No more than 15% of the total units may be in arrears of their HOA dues (30 days past due).

Commercial space: Nore more than 25% of the property’s total floor area in a project can be used for commercial purposes.

Conversions: The one year waiting period is eliminated, though the project, including common areas, must be 100% complete.

Endorsement: At least 50% of the units must be sold prior to endorsement of any mortgage on a unit.

Legal phasing: Allows the owner occupancy percentage to be based on release phases.

Recertification: Project approvals will expire two years from the date it was placed on the approved condo list and must be re-certified every two years.

As it is currently written, once the two years are up and condos need to be re-certified, as well as those projects hoping to be approved, may run into an issue with the environmental review section of the guidelines. The guidelines do not allow for projects to be within 1,000 of a highway/freeway, within 3,000 feet of a railroad and within 1 mile of an airport. Potentially, this could affect numerous projects along I-5, Aurora Avenue and throughout Belltown. However, it’s likely the rules may be amended again within the next two years.

This is only intended to provide a high-level overview of the upcoming changes to FHA backed mortgages. For more specific information, including whether FHA is an option for you, please consult with a FHA mortgage specialist.

Sources: HUD Mortgage Letter 2009-19 (WORD download), Guild Mortgage Company, and the Talon Group.

With the credit crunch and constricting mortgage availability, FHA loans have recently become more appealing to buyers. Loan officers at Wells Fargo and Response Mortgage have told me they’ve seen a significant increase in FHA backed loan applications over the last few months. FHA is not a lender so they do not actually provide the funds. Rather, FHA insures loans that meet specific criteria, which is usually a bit more lenient than for conventional loans. As a result, FHA provides homeownership opportunities for people who may not otherwise qualify under conventional guidelines.

Here’s an overview of FHA benefits and requirements. The following is only a summary about the program and should not be considered exhaustive. Although, this provides a good starting point for buyers, for more concise information regarding FHA, please consult your loan officer.

Benefits of FHA loans:

 

• A minimum investment of 3%. This can include a combination of borrower paid down payment and closing costs, or gift funds. Most conventional loans today require 5% down or greater, not including closing costs. Some costs are excluded such as discount points, prepaid items, seller paid closing costs, etc. This rate will increase to 3.5% effective January 1, 2009.
• No minimum FICO requirement, making loans available to those who don’t have high enough FICO scores for a conventional loan.
• More lenient qualifying ratios of 31% front-end (gross income / PITI) and 43% back-end (gross income / PITI + other monthly liabilities). The conventional loan qualifying ratios are 28% and 36%, respectively. FHA allows buyers to use a higher percentage of their income towards housing costs.
• People with bankruptcies may qualify. For Chapter 7, borrowers may be eligible two years from the discharge date. For Chapter 13, borrowers may be eligible while in repayment status.
• Allow for seller concessions and contributions up to 6% of the sales price. This is above and beyond the buyer’s 3.5% contribution. Examples of seller constributions include closing costs, prepaid expenses, discount points and interest rate buy-downs.
• Cash reserves are not required, except for 3 or 4-unit properties.
• Gift funds are acceptable. All funds can come through via a gift; the gifter must be someone close to the buyer such as family, significant other or friends with a justification letter.
• Loans are assumable, provided the prospective buyer qualifies.
• There is no pre-payment penalty.

Specific to FHA:

FHA loans are subject to a maximum amount depending on location. For King, Pierce and Snohomish Counties, the maximum loan amount is $567,500 through December 31, 2008 (as part of the housing stimulus bill). Thereafter, the maximum loan amount will likely be around $506,000.

FHA requires two types of mortgage insurance premiums (MIP) – up-front and annual. The up-front MIP is 1.75% of the base loan amount and can be added to the total loan amount or paid in cash at closing. The annual MIP is termed annual but paid monthly. On a 30-year fixed the premium is 0.5% of the base loan amount, which is applicable for a minimum of 5 years and cancelable when LTV reaches 78%. Two important notes regarding the annual MIP: 1) even if the LTV drops below 78% the buyer must wait 5 years before they can cancel the MIP, and 2) it cannot be canceled for condos.

One loan limitation. FHA only insure loans for principal residences, so buyers are limited to one FHA loan at a time. There are exceptions for relocation, increased family size, divorce and if the borrower is a non-occupant co-borrower.

Who is eligible for FHA?

• U.S. citizens
• Permanent resident aliens
• Non-permanent resident aliens – must have an SSN and hold a valid visa or is eligible to work in the US as evidenced by an EAD issued by the U.S. Customs and Immigration Service. Acceptable visas include H1, L-1, E-1, TN, A Series and G Series.

FHA is not available to non-citizens who do not have lawful residence in the U.S. or individuals with diplomatic immunity.

FHA Enhancements:

As a result of Congressional reform actions this year, several enhancements were made to the FHA program. The FHA appraisal requirements were relaxed, the required $150 seller fee is no longer necessary and processing and underwriting were streamlined and standardized. Other changes include the expanded qualifying ratios, the increase in borrower investment from 3% to 3.5% (delayed) and a change in the up-front MIP percentage.

FHA and Condos:

For condominium purchases the condominium development must be approved by HUD in order to be eligible for FHA loans. To view a list of approved condos, click here. In Seattle, there are currently 325 condominiums that are HUD approved, though the list may not be up-to-date. However, FHA spot approvals for condos are becoming increasingly utilized, primarily for resales. Lenders can receive a case-by-case spot approval provided the condo meet certain qualifications, which does limit the number of condos that are available under the program. For spot approvals, generally the development must be at least 51% owner occupied, 90% of the units have sold, the HOA has existed for at least 1 year, must have been converted for at least 12 months (if a conversion), plus a number of other requirements. While there are some hurdles, it is an often overlooked mortgage option and worth looking into.

Fortunately, developers are paying heed. New developments like Thornton Place applied for HUD approval and expects to receive acceptance shortly, if not already. Developers of a number of conversions have also applied for HUD approval as many now meet the guidelines.

Given the ever constricting conventional mortgage loan availability, FHA is becoming an appealing option for many buyers, particularly here in the Northwest. For more information or questions about FHA, we recommend buyers speak to a mortgage loan officer who has experience with FHA loans.

Here’s a few recent FHA resources from the ‘net:
– Let FHA Loans Help You, the official HUD/FHA website
– A Solution for FHA Buyers Searching for a Down Payment, The Mortgage Porter
– FHA is waiting to give you a loan, The Seattle PI
– FHA financing SHOULD be KING – If agents are ready, The Seattle Specialist