The Mortgage Professor: FHA approval useful, but elusive, for many condo owners

Article Courtesy of The Orlando Sentinel

By The Mortgage Professor

Published February 16, 2014


If a condo meets Federal Housing Administration approval, purchasers of units in the condo are eligible for FHA financing. This is advantageous to existing residents who want to sell their units, or may want to in the future. It is also advantageous to existing residents who want to stay put but anticipate that at some point they may run short of money and look to the possibility of taking an FHA-insured reverse mortgage. Yet despite these advantages of FHA approval to condo residents, many condos that meet the agency's requirements have never sought approval or have allowed their approved status to lapse.

The FHA condo-approval requirements are 95 pages long, vary with the type and size of the condo, and are not easy to summarize. Much of it has to do with what constitutes acceptable documentation and procedures.

In general, the requirements are designed to protect residents against financial hazards arising from their responsibility for the condominium's affairs. Rules that protect the residents also protect the lenders who make condo loans, which in turn protects the FHA as the insurer of those loans. Here are a few of the more obvious ones:

On a new condo, the developer must have sold at least 50 percent of the units in the project to permanent owner-occupants. This minimizes the risk that the condo is not economically viable.

No more than 15 percent of the units in the condo can be delinquent more than 60 days on their condo association fees. This minimizes the risk that dues-paying residents will have to cover the deficiencies of those in arrears.

The condominium must be covered by hazard, flood, liability and other insurance required by state or local condominium laws or acceptable to FHA. This minimizes the risk that a natural or other disaster will jeopardize the solvency of the condo.

Note that Fannie Mae and Freddie Mac have condo requirements that are similar to those of FHA, though less extensive. If a mortgage loan that will be sold to one of those agencies is secured by a condo unit, the condo project must be approved by the agency purchasing the loan.

If a condo is FHA-approved, a unit in the condo can be sold to a borrower who needs the low down payment available on an FHA mortgage to make the purchase. This expands the pool of potential buyers for a condo unit.

In addition, potential buyers may view FHA approval of a condo as akin to a Good Housekeeping seal. It means that the condo complies with a wide range of requirements bearing on its financial soundness, eliminating the need for potential buyers to conduct their own examination.

Residents of condos who have reached an age where they begin to think about retirement ought also to consider the possibility that they might need to supplement their retirement income by taking out a reverse mortgage. All of the private reverse mortgage programs folded up after the financial crisis of 2007-2008, while Fannie Mae terminated its reverse mortgage program in 2010. This left the FHA home equity conversion mortgage program as the only one still functioning.

Seniors living in condos, however, are eligible only if their condo is FHA-approved.

A condo may not be FHA-approved because it does not meet the agency's requirements. The financial crisis added to the number of such condos by increasing the delinquency and foreclosure rates of residents, which reduced the incomes of condo associations. How these troubled condos can meet such challenges is a topic for another article. My focus here is on condos that do meet the FHA requirements but are not FHA-approved, either because they have never sought approval, or because they have allowed their approval to lapse.

Sponsors of new condominiums often seek FHA approval at the outset in order to make it easier to sell the units. If the sponsor doesn't get FHA approval at the beginning, the condo board that ends up administering the affairs of the condo is not likely to seek it later on unless there is strong sentiment among the residents that it is advantageous for them.

Jim Deanne, whom I interviewed in connection with this column because he acts as a consultant to condo boards looking to get approved, estimates that less than half of those who would qualify are actually approved. The cost is not a significant deterrent Deanne charges only $995 for guiding the board through the entire process, and $500 of that is not payable until approval.

The major reason why more condos are not FHA-approved is the apathetic myopia of residents. While FHA approval makes it easier to sell units in the condo, this is immediately relevant only to those condo residents with concrete plans to sell. This is usually a small group. Other residents are likely to be indifferent until their time comes to sell. Similarly, only a small number of residents are likely to be interested in a reverse mortgage at any one time. Most residents who are too young to qualify don't believe they will ever grow old or run out of money when they do.