The Seattle Condo Blog

The Federal Housing Administration announced rather sweeping changing to its popular FHA backed mortgage program. The changes are being implemented to manage and reduce risk and to continue providing affordable financing options.

The proposed changes, which are expected to go into effect this summer, include:

Increase in the mortgage insurance premium (MIP) from 1.75% to 2.25%. It’s an upfront fee that can be rolled into the loan. FHA will release additional information on January 21.

Increase down payment amount based on FICO score. To maintain FHA’s low 3.5% down payment option, borrowers will need a minimum FICO score of 580. For those with FICO scores below 580, the down payment will be 10%.

Reduce seller concessions from 6% to 3% (e.g. seller paid closing costs). According to the FHA, the current level exposes the agency to excess risk by creating incentives that inflates the appraised value. The change would bring FHA into conformity with industry standards.

For borrowers, the net effect of the proposed changes would increase the costs associated with an FHA backed loan. On the other hand, compared to conventional loans, FHA is still a lower cost option with more flexible requirements. Furthermore, with the other FHA condo guideline changes, the changes noted above may affect even fewer condo buyers.

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.

HUD announced today that it has approved the monetization of the $8,000 first-time home buyers tax credit, making it available to buyers at the time of purchase.

Here’s a few highlights:

• Housing Finance Agencies such as the Washington State Housing Finance Commission and certain non-profits will be able to monetize the tax credit, offering a loan against the tax credit at the time of purchase, which buyers can apply towards the down payment.
• For buyers using other FHA-approved lenders, the monetized tax credit can only be applied in excess of FHA’s required 3.5% down payment or towards other closing costs. In other words, it cannot be applied towards the initial 3.5% down payment requirement. As a result, most people will be able to use the monetized funds for closing costs rather than towards the down payment.
• This option only applies to FHA-insured mortgages, not conventional loans. As such, it’ll benefit buyers of single family homes or townhouses more so than condos. The reason for this is that FHA-insured loans are only available to HUD-approved condos. With only about 300 approved buildings in Seattle, many condos are not eligible. Additionally, HUD limits the number of FHA-insured units in a condo complex to 10% (e.g. only 2 units in a 20 unit complex will be eligible for FHA).

While this particular monetization option isn’t likely to help Seattle condo buyers much, it’s definitely a great option for first-time buyers who are taking advantage of FHA-insured mortgage loans. At the very least, buyers can increase their down payment amount or cover closing costs. The recently passed state version would help condo buyers but that seems to be dead in the water at this point.

The $8,000 first-time home buyers tax credit will expire on November 30, 2009. So if you’re interested in taking advantage of the credit, keep in mind, there’s only about 4.5 months left to get under contract. Also, the King County courthouse will close beginning Wednesday, November 25th for the Thanksgiving holiday weekend, you’ll essentially need to close/fund/record the purchase by November 24th to qualify for the credit.

More information:
HUD/FHA: Donovan announces recovery act’s homebuyer tax credit can immediately help thousands of first-time homeubyers to buy a home
SeattlePI.com: Feds will allow tax credit for down payment, closing costs

During the past two years, new developments placed restrictions on the number of investment sales as a result of the flipper debacle at Cosmopolitan and 2200. Now, the mortgage markets seem to be putting real estate investors, particularly condo investors, out to pasture with ever tightening rules and higher fees.

A couple of weeks ago I mentioned the new 0.75% add-to mortgage fee for condo purchases with less than 25% down, or more than 75% loan-to-value. Now, if you’re purchasing a property as an investment (that is, not your residence) there is an additional 1.75% fee for loans greater than 75% loan-to-value. Combined, that’s up to another 2.5 points on top of the mortgage interest rate if you have less than a 25% down payment. Though, if you’re getting a great deal on a unit, even with the 2.5 points, it could still pencil out.

Update 2/6/09: Fannie Mae updated guidelines, will now allow up to 10 financed properties with a 720 credit score and 70-75% maximum loan-to-value depending on transaction and property type. In addition to higher fees, there’s also a restriction on the number of investment properties held with mortgages to no more than four. If you already own four or more properties and are looking to add another one to your portfolio, you may not be able to find a willing residential lender.Course, if you’re a cash buyer, you’re golden.

Finally, there’s an added fee if you have a credit score below 720; Investor or not, there could be an additional fee ranging anywhere from 0.5% to 3%.

Unfortunately, the looming financial crisis and banking bailouts haven’t yet translated to actually assisting would-be buyers and sellers.

A number of mortgage blogs have been reporting about a new Fannie Mae fee for condo purchases. Locally, Rhonda Porter noted on her Mortgage Porter blog the new add-to fee will be an additional 3/4 percent (0.75%) for loans with an LTV greater than 75% (25% or less in equity). Thus, even for buyers coming up a 20% down payment there will be an additional 3/4 percent fee added. The new Fannie Mae fees will be effective as April 1, 2009, though buyers may see those fees earlier depending on their lender.

The fee can be paid up front or priced into the interest rate. For example, on a $350,000 condo loan, buyers with less than 25% down payment will have to come up with an additional $2,625 up front, or if priced into the rate, will see an increase in the monthly payments by about $165. That’s quite a difference.

To avoid the fee buyers should consider either buying or locking-in rates now. The fee does not apply to loans with amortization terms of less than 15 years or to FHA loans.

Update 1/16: I’m hearing from a few loan officers now that lenders have begun assessing the new 0.75% condo fee so locking may no longer be helpful.

A number of new condo developments have obtained FHA approval.  With FHA approval, buyers can more easily obtain FHA financing for their purchase.  Compared to conventional loans, FHA provides low down payment requirements, slightly more lenient guidelines with higher ratios and allows for gift funds.  In King County, the FHA loan limit is $506,000.

Here’s a list of recently completed developments that have obtained FHA approval:

Gallery – Belltown, website

Trio - Belltown, website

Parc – Belltown, website

Blue Heron – Magnolia, website

Danielle – Ballard, website

Noma – Ballard.  Noma is sold out but re-sales are eligible for FHA financing.

Sylvan Ridge – West Seattle, website

Ruby Condos – Eastlake, website (pending approval)

Thornton Place – Northgate, website (pending approval)

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