Market Conditions: Condo Buildings Struggle to Get and Maintain FHA Approval
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]
We need to get Russ’ POV on this topic. A year or so ago I helped a building get FHA approval and it didn’t seem like that big of a deal. The biggest obstacle was convincing the board that FHA wouldn’t bring in undesirables. However, I just coordinated things. The heavy lifting was done by a mortgage lender who helped the building get through the approval process in a bid to get in front of board members and interested unit sellers. Russ, is that something lenders routinely do and how much does it really cost? I think the lender we used either ate the costs or charged a minimal fee.
we were quoted $500 for someone’s husband to do the paperwork for us.
Have the rules changed or is this normal Fha process?
I bought a foreclosed condo, did a light rehab and sold last year. It was a modestly priced condo that appealed to first time buyers. I convinced the condo board president to seek FHA approval. It was a paperwork nightmare trying to get all of the condo docs together and having underwriters ask for more and more. Finally we were approved! A week later my eventual buyers made an offer with conventional financing, 20% down. So FHA didn’t help me personally, but it may help some of the other sellers in the building.
dahliachi,
The mortgage lender that did this for the building I was helping handled a LOT of the paperwork. They made it relatively easy for the building.
In the early 90’s I bought a condo in a large new condo complex in Southern California. If memory serves me correctly, it was in the CC&R’s that you were only able to rent your unit for 1 year. After that time, you had to sell(or of coarse keep it vacant) that way in an emergency, you could get income for a year, but the complex never became over-run with rentals. This of coarse would really suck for an owner in an economy/market like this, but from a selfish standpoint, I would never buy a condo without something like that in the CC&R’s.
Yea, we worked with a mortgage broker, but we still had to get all of the paperwork together. For example, there were amendments to condo docs that had the same doc numbers , but did not have continuous pagination. Underwriting kept asking for missing pages, etc.
Luckily it was free for us.
If your board has every single required doc filed as a PDF, then I could see how this project would be easy.
Personally I found it to be the same paperwork nightmare as getting a mortgage.
I like the idea of FHA rules that limit the number of rentals, but I also don’t like that the FHA provides mortgages to people who can’t afford to own.
The problem I have with the limited rental clause is it’s a one-size-fits all rule. 51% owners of a 100 unit building is different than 51% of a 4, 10 or 14 unit building.
And yeah I know those are apartment buildings that never should have been converted in the first place so lets not doing anything to help those people get out of their predictiment.
The process is relatively easy if your HOA is organized – condo decs, by laws, budgets, etc. The problem is most HOAs are not very organized, so it seems like a difficult process. We have someone on staff who works to get the buildings approved as needed.
The problem is FHA eliminated “spot” approvals a couple of years ago and replaced it with a process by which the entire building had to be approved instead of individual units. They also changed some of the liability associated with the approvals which meant the vast majority of lenders refused to do the approvals themselves of the entire building and put it back on FHA. Naturally, this change caused issues because it meant borrowers who needed to use FHA were severely limited in their search.
I get calls every month from clients with small HOAs who either want to get their building FHA approved or are concerned about getting the building FHA approved. Without FHA approval, it certainly shrinks the buyer market for a particular building. However, there can be legitimate concerns about weaker FHA buyers.
Most of the larger HOAs unless the building is uber-high end are probably going to be FHA approved or go through the process. FHA really should be a non-issue for higher end buildings as the loans aren’t going to be needed for the buyer pool. The challenge is the smaller 2-10 unit or so buildings where the decision to allow FHA can be more contentious among current owners imho.
Also, FHA is not solely for weak buyers. Most lenders overlay FHA guidelines so the typical FHA buyer is not weak typically other than down payment or in some cases credit score. Fannie/Freddie severely penalize borrowers who don’t have 740 FICO (regardless of why) or higher whereas FHA does not and will allow down to 640 typically with no penalty. We often see very qualified borrowers who have a very small credit issue (missed a gas bill during a relocation and now has a 670 FICO) or h1-b engineer making $150k working at Google with 20% down but not enough US credit history. FHA benefits these borrowers as well.
“And yeah I know those are apartment buildings that never should have been converted in the first place”
I can’t completely agree.
Some of them are McCrapBox condos that never should have benn *built* in the first place.
Kristy Fender & Dan Harvey are doubly financially shrewd–buying a condo in the south loop in this market combined with buying a condo together being unwed.
Why just cosign on your girlfriend’s car note when you can go all out & do it on the mortgage.
Good thing we have the FHA for the Fender+Harvey households out there.
They implement rules like this because FHA is losing its pants on bad loans but the 50% rental rate isn’t going to help much. Why not get the federal government out of it altogether and stop having taxpayers subsidize high real estate prices for non creditworthy buyers. The whole process is bizarre but then what isn’t with the federal government as it stands today.
EB,
I’m with you on this. The government needs to stop subsidizing real estate. The only bailout money that won’t be paid back is the money given to Fannie and Freddie – although I’m not sure about the auto bailouts. The Fannie/ Freddie losses are at least $240B and counting.
If mortgage rates go up then so be it. If housing prices go down then that meets another government goal: affordable housing.
Tangential question: I’ve recently been exposed to several realtors through some common friends/events. One of the topics that came up was how it was currently “easy” to get jumbo mortgages. This was completely contrary to what I’ve heard through the interwebz.
So, to those with knowledge of the situation, which is it? Are jumbos mortgages hard or easy to get right now? (My assumption being a buyer with great credit, a 20%+ downpayment, good employment history, etc.)
I have a feeling this was just realtors trying to convince themselves that financing isn’t a problem in this market…
We just went through this whole thing in our small HOA. Some owners are ready to wash their hands, move out and rent. Others are happy there and don’t want their building all messed up with renters. It’s tough either way. Basically, the rules we agreed to were no more than 2 units (8 unit building) can be rentals and you get a 3 year limit on how long you can rent. We did this for the FHA compliance and also so that if a unit wound up in foreclosure it wouldn’t be bought by an investor and rented out.
Barry, follow up question. What mechanism do you have to keep people from renting beyond the 3 years? Fines? Threat of liens?
TftInChi, jumbo financing is easier if you have the liquidity for the down payments. In general, jumbo underwriting is SIGNIFICANTLY easier than Fannie/Freddie imho.
The reason is because since jumbo loans are primarily being held on the books of the bank, you see a lot more common sense applied and there isn’t the death by paper cuts that has become conventional Fannie/Freddie underwriting. When banks underwrite to F/F, it is more coloring by numbers which means you get asked for a lot of non-sense (verifying $250 deposits in checking accounts with $50k in cash, etc). Even though it makes no sense, if we don’t document it, we can’t get the loan sold off to Fannie/Freddie. Jumbo lenders also aren’t as strict on rental rates, commercial space, and all the other little condo nuances that have a tendency to kill conventional deals sometimes.
On the other hand, jumbo appraisals definitely get scrutinized more in my experience.
just talked to my lender about jumbos. You need 20% down and a credit score of 700, once you’ve met that and income requirements, I don’t think they’re that difficult to get. Many interest only and conventional options out there right now with rates at 4.25 and up.
I wonder how HD feels about Jumbos….
@Icarus – I don’t think we ever really ironed out that part. I can let you know in three years.
Gvt. involvement does increase prices.
It’s a catch-22, lower housing costs/prices would be good for all (i.e. like lower gas prices too), but since so many people view their home as an investment, it’s bad if values fall.
So, is housing an asset value? or a cost (of living)?
Gvt. seems to side on propping up values, rather than letting prices and costs fall.
Russ is right on target.
I have refinanced my Jumbo loan each of the last 3 years. It seems easy now because there is a jumbo loan market now. 3/4 was difficult – you’d have few choices and they were 200-300 basis points higher than conventional.
Now there are more choices. I have an adjustable loan at about 2.5% currently. It will probably go up in the next few years, but it is a substantial savings over what was offered in the jumbo market just a couple years ago.
Russ commented about the underwriting being easier for portfolio loans. While that seems/is true, the appraisals are still difficult. The appraisers use the same methods for $3 million homes as the do for 300k homes (sq footage/beds/baths/fireplaces). An extra bedroom may be an important factor to those buying a 300k home, but for those buying a $3 million home it most likely is not. These buyers (I would think) are more interested in finishes/views/decor/woodwork/architecture/location. In my experience, appraisers are reticent to apply too much premium for those attributes because it requires them to be subjective and the appraisers are much more comfortable using objective comparisons. You end up with houses that are desirable to buyers, but don’t appraise. And houses that aren’t desirable to the high-end buyers do appraise. It would be cool if the jumbo lenders could customize their appraisal process like they have adjusted their underwriting process. I don’t know if that is possible, however.
3/4 years ago*
Either home prices need to drop or larger % financing needs to be made easier to get (or loan terms need to get longer). Since the mid-20th century, median household income has gone up <50% while median home prices are up 300%. It is just no longer reasonable to assume that the average household can put away 20% in a reasonable amount of time. If this doesn't occur, home ownership is going to be pushed to the upper-middle class and above, leaving the other 95% to rent.
” If this doesn’t occur, home ownership is going to be pushed to the upper-middle class and above, leaving the other 95% to rent.”
There is nothing wrong with this happening….. in fact, I wish it would.
“Since the mid-20th century, median household income has gone up <50% while median home prices are up 300%."
Cite, please.
“It is just no longer reasonable to assume that the average household can put away 20% in a reasonable amount of time.”
This is only because most people are financial idiots and make poor decisions. There’s a reason the traditional requirement is for a 20% down payment – it ensured that people who buy houses, and the interests of their lenders, are able to weather job losses, recessions, drops in value, etc. The fact that the average household doesn’t need to be financially responsible to buy a house is part of the great decline of financial literacy. I think that limiting the down payment to 10% or 15% might be a reasonable point to make, but to point out that it’s not “reasonable to assume” that people can meet the traditional requirements and that’s a reason to change them is, in my opinion, going about that issue the wrong way.
Thanks for all the info and personal experiences. I suppose I shouldn’t be skeptical of *everything* I hear from realtors. 😉