In the late 1990s, I did a lot of condo financing. I developed a niche for myself, and a reputation for being able to successfully get builders’ condominium conversions approved for Federal Housing Administration (FHA) financing. It was a mark of separation from the competition, and it paid off well. Previously, only the FHA could grant approval to condominium projects for FHA financing. However, with the recent Mortgagee Letter 09-19, this changes. Now, “… FHA will allow lenders to determine project eligibility, review project documentation … The requirements of this Mortgagee Letter are effective for all case numbers assigned on or after Oct. 1, 2009.”
Lenders must have unconditional Direct Endorsement (DE) authority and staff with knowledge and expertise in reviewing and approving condominium projects. This FHA update is quite lengthy; I will provide you with the highlights here.
Here are the 14 things you need to know about these changes:
1. New guides are applicable to Proposed/Under Construction; Existing Construction or Conversions.
2. The Spot Loan Approval (SLA) process, as defined in Mortgage Letter 1996-41, is eliminated.
3. Project Approval is not required for FHA-to-FHA streamline refinance transactions or properties being sold by the U.S Department of Housing & Urban Development (HUD).
4. If a lender elects to approve the project, then environmental reviews will not be required, but any known or discovered hazards (such as proximity to a highway, landfill, railroad or airport) may make the project ineligible unless remedied.
5. Association by-laws may now have a Right of First Refusal clause, unless it violates discriminatory conduct under the Fair Housing Act.
6. Property may utilize 25 percent of the total floor area for commercial purposes.
7. No more than 10 percent of the units may be owned by one investor.
8. No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
9. At least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. This means you won’t be able to close the loan until this presale requirement has been met. Valid presales include an executed sales agreement and evidence that a lender is willing to make the loan.
10. At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. On multi-phased projects, the owner-occupancy percentage is calculated on the first declared phase and cumulatively on subsequent phases if the ownership of the condominium project remains the same. If multi-phasing includes separate ownership per phase, each phase is calculated individually. No more than 30 percent of the total units can be encumbered with FHA insurance.
11. Condo conversions no longer require the homeowners to be in control of the association for one year. This means condo conversion units will be eligible once the 50 percent presale requirement is met.
12. Manufactured housing condominium projects are now eligible for FHA mortgage insurance.
13. Condominium project approvals will expire two years from the date they are placed on the list of approved condominiums. If a project has been previously approved, lenders must certify that they are not aware of any change in circumstances since initial approval of the project which would result in the project no longer complying with FHA requirements.
14. Whoever knowingly and willfully makes or uses a document containing any false, fictitious or fraudulent statement or entry, in any matter in the jurisdiction of any department or agency of the United States, shall be fined not more than $1 million or imprisoned for not more than 30 years, or both.
Some perspectives on the new process:
Although the FHA has now given lenders the ability to process their own condo approvals, it's not a carte blanche to go out there and start financing condos. The lender must have staff knowledgeable about the process and very few DE lenders have staff familiar with the condo approval guides. In addition, what lenders are going to want the extra liability in processing and certifying their own condo approvals? The last thing lenders are looking for is more liability. Given this reality, I foresee very few lenders participating in this offer. Lenders like Countrywide and Flagstar may utilize this guide, since for years, they have had their own internal condo approval departments apart from FHA. I can see lenders involved in the re-certification, since the lender will only be certifying that they know of no changes to the project that would disqualify it. It will be interesting to see how the lenders actually react to this guide.
The decision to eliminate Spot Loan Approvals (SLAs), in my opinion, will deny ownership to thousands of potential condo purchasers and will negatively impact condo sales across the country. I think this was a poor decision and the SLA should be reinstated. SLAs allowed people to purchase a condo in a project without having to go through the project approval process. To have to approve an entire project for one buyer is not practical. I actually did this once for a buyer and it was a lot of effort for just one loan. In addition, there's inherently less risk to HUD, since SLAs are typically done in already-established condominium projects. It doesn't make sense that HUD would insure a higher risk unit in a new project (that has only a 50 percent presale requirement) and yet and not insure a unit in a well-established project with an SLA, which is clearly a lower risk. If HUD truly wants Hope for Homeowners, then they should bring back the SLA.
If you do work for a lender that is willing to take the risk in this program, the great advantages I see with these changes are:
1. The elimination of the environmental review.
This was a huge deterrent for builders due to the expense involved, and one of the main objections that was difficult to overcome for me to overcome when educating developers on the benefits of getting their condo approved with FHA.
2. No longer requiring that owners be in control of the association for one year on condo conversions.
This change makes it a lot easier to get in with a developer that is converting apartments to condos. I chose this as my niche because it lacks the time to close on new construction.
3. The allowance of FHA financing on manufactured housing condo projects.
This is a huge marketing opportunity, since this is now a wide open market and controlled by the banks … but not for long. Just make sure you have a funding source for the types of units the developer will be offering.
Condo financing is a great niche to have, and I had a lot of fun when I did it. A word caution … if you develop a good reputation for getting condos approved, make sure you have a true relationship with the developer that will bring you in to get their project approved, and that the developer isn’t just using you for the approval with the intention of then using their long-standing lender (i.e., that does FHA loans but lacks the know-how to get condos approved). As you might guess, this once happened to me, and I don't want it to happen to you.
Jeff Mifsud founded Southfield, Mich.-based Mortgage Seminars LLC in 2004, has been an FHA originator for 12 years, is a contributor to LoanToolbox.com and is a former FHA underwriter. Jeff may be reached at (877) 342-9100.