FHA Loans – The Answer for Buyers and Sellers
By Gregory A. Braun, Partner
McCormick Braun Friman, LLC
Standards for loan approval have become markedly tighter over the past several months. Lenders scrutinize the borrower’s credit, income, income history, savings and sources of savings. During underwriting, lenders ask for documents like never before, including school transcripts and cancelled checks showing who paid off student loans and credit card balances. Because of tighter credit, FHA loans have become more prevalent than ever. FHA loans are more attractive because they require lower down payments (3.5%), have more liberal rules regarding source of funds, require lower monthly insurance, and have lower credit score requirements. Since first time buyers are the biggest part of the market, Sellers need to attract all buyers, especially those with FHA loans. FHA lending allows all borrowers, but especially first time buyers who lack large down payments and established credit, to purchase.
This year, FHA eliminated Spot Approvals for FHA transactions. Spot Approvals enabled lenders to underwrite one unit in a condominium building and allow that unit alone to be eligible for FHA approval, even if the entire building did not have that important designation. As of February 1, 2010, however, no Spot Approvals are allowed. Now, not only must the buyer qualify for FHA financing, but the entire condominium building must be eligible. For that reason, if the buyer is otherwise well qualified, but the association does not meet traditional Fannie Mae/Freddie Mac (or “Conventional Financing”) requirements, FHA may be the only solution.
Historically, FHA had been considered an unfavorable method of home financing because of its complications and costs. Since the retraction of Conventional Financing, FHA financing has become a necessity. FHA guarantees the loans banks make to their customers so that the rates offered are among the lowest available. You see, in today’s market, there are more first time buyers and they often are just establishing credit and have not had time to accumulate large down payments. Even move-up buyers have had credit issues resulting from the dip in the economy and their shrinking home equity. FHA also provides excellent rates and stringent screening of condominium associations.
FHA requires that the building have no more than 10% of the units owned by a single entity, no more than 15% of the units 30 days delinquent in assessments, a budget with at least 10% replacement reserves and funding for all insurance and deductibles, 51% of the units owner occupied and no more than 25% of the building containing commercial space, as well as some other factors.
Many associations have been proactive and are getting their buildings approved. Others shy away because they think less restrictive FHA requirements will attract undesirable buyers. We have seen that FHA building approval allows sellers to attract the greatest number of potential buyers, keeping prices stable. It is always better to have a FHA buyer who can pay assessments compared to a struggling unit owner who cannot pay them.
Several documents must be sent for review for FHA building approval, including the condominium declaration and bylaws, condominium survey, the budget and a questionnaire, owner occupancy certification, among other things. The package can be submitted directly to Housing and Urban Development (“HUD”) for Review and Approval Process (“HRAP”) (6-8 weeks or more). Alternatively through a Direct Endorsement Lender Review and Approval Process (“DELRAP”), approval can be achieved in a couple of weeks. DELRAP underwriters have expertise in reviewing and approving condominium projects and making sure the project meets the standards so FHA accepts them without conditions. Knowledgeable condominium attorneys, like McCormick Braun Friman, can resolve issues before submission, making sure the condominium documents conform to FHA standards.
Gregory A. Braun concentrates his practice in real estate law, serving individuals buying and selling houses and condominiums, builders, developers, and investors. Greg provides counsel to these clients in areas including FHA submissions, short sales, lending issues and foreclosure workouts/bankruptcy, compliance with federal, state and local development requirements, construction, insurance, corporate and tax matters, including 1031 exchanges. The firm offers a host of legal services, please visit www.mbflegal.com for details. Greg can be contacted at firstname.lastname@example.org, 312-327-3354.