Just as credit remains tight, especially for new buyers who might not have a large downpayment, comes word that some condo buildings in Chicago are losing FHA eligibility and others that are applying for it are getting turned down.
From the Chicago Tribune:
Since Feb. 1, 2010, condo buyers haven’t been able to secure unit-by-unit “spot” approval for FHA-backed mortgages if an entire building was not certified. Instead, the federal government set criteria to determine the financial viability of an entire building before deeming the project as FHA-approved, even if it had previously been certified. An approval lasts two years.
The number of rejected buildings is adding up, due to bad paperwork and bad balance sheets as an increasing number of condo associations struggle with rentals, short sales and foreclosures. It is jeopardizing the plans of condo sellers who rely on the FHA’s stamp of approval as a marketing tool and condo buyers who either want or need an FHA-approved building.
Since Oct. 1, almost a quarter of the 206 Illinois condominium communities that have gone through the certification process have been rejected by the FHA. Those 48 buildings, which range from three-flats to high-rises, add up to 1,900 units in Chicago and its suburbs. The national rejection rate during the same time frame was 38 percent.
An additional 863 condo communities in Illinois, including 563 in Chicago, were approved by the FHA in 2010, but their certifications are set to expire this year.
So all those buildings that rushed to get certification a few years ago, now face the process again. Some will be able to pass, some will not.
That will obviously impact buyers decisions. And condo boards also have a decision to make because it isn’t cheap going through the certification process.
For buyers like Kristy Fender, of Chicago, FHA certification is a must-have on her list, and not just because it lets Fender and her fiance, Dan Harvey, make a smaller down payment on a home purchase. She also figures that in approving buildings the FHA is doing the due diligence that she would otherwise have to do.
But the process has been much more complicated than Fender imagined, and she’s wasted a fair amount of her time. During the past few months that she’s looked at units in Chicago’s South Loop, she’s incorrectly been told that a unit can get spot approval and has looked at units that were listed as FHA approved, only to find out the certification had expired. Her real estate agent, Bette Bleeker of Prudential Rubloff, wound up routinely checking property listings against the FHA’s website of approved buildings.
“It’s been very frustrating,” Fender said. “There’s a lot of wishy-washy information out there.”
Fender and her fiance now plan to made an offer on a South Loop condo, but the offer will be contingent on the association getting the building certified for FHA financing. Bleeker has spoken with the building’s management company.
A high number of renters in a building can doom an FHA application, which requires that a building must be more than 50% owner occupied.
Financially, the 249-unit condo building at 1620 S. Michigan Ave. in Chicago is stable, said condo board President Jeanette Johnson. Nevertheless, she worries that the building won’t pass the test when its certification expires next month because of the high number of renters residing in units.
“I’m anticipating that the board will try to do the recertification, but I don’t know if we’ll qualify,” she said. “We’ll need to evaluate that before we spend any money. It’s definitely on the radar screen.”
If the building doesn’t qualify, Johnson said, it’s likely the board would look to change its declarations and bylaws, itself a difficult and lengthy process, to gradually reduce the number of renters allowed in the building.
The Community Association Institute believes the FHA’s requirements are having a “chilling” effect on the market, and the trade group has asked for flexibility in the guidelines.
“When it comes to the condo market, that is the gateway to affordable housing, and FHA should play a critical role in that,” said Andrew Fortin, a vice president at the trade group.
Will lack of FHA certification put a damper on the condo market in 2012?
And is this just the beginning on even tighter standards for buyers once Freddie/Fannie are restructured?
FHA approval a certifiable problem [Chicago Tribune, Mary Ellen Podmolik, January 22, 2012]