Purchasing a condo seems like a smart move financially – they are less expensive; there are fewer items you must buy to keep the exterior of the home up; and you have neighbors that can help you out in a pinch. Lenders look at condos in a less positive light; however, which is why every association must meet certain requirements with the FHA in order for you to get FHA financing on them. This approval is not easy to obtain, which is why it is in your best interest to look at condos that already have the approval in place because obtaining it from scratch can be a lengthy process.
What the FHA Wants from Condo HOAs
Basically, the FHA approves condo associations that are not risky. The FHA determines the level of risk by taking a close look at who lives in the other units. They don’t care how the people live, what they do care about; however, is who owns the condo. They care about this because most people that live in the condo they bought are going to do whatever they can to make the payments on time. If a large majority of the occupants are renters, renting the unit from the actual borrower of the mortgage, there is not a lot of urgency when it comes to making payments. If a large number of the condo units get foreclosed upon, the values of the surrounding condos go down and all loans are at risk for default. This is why the FHA wants 50 percent of the condos to be owner occupied in order for the association to receive FHA approval.
The FHA also wants borrowers, at least 85 percent of them, to pay their association dues on time. What happens when condo owners do not pay their association fees is that the abilities of the association go down. They stop taking care of the property as they once did because they do not have the finances to do so. If condo owners become too delinquent on their fees, the association may take legal action which takes up even more resources of the association. This makes current homeowners more likely to stop making their payments or to consider not making their mortgage payments in an effort to get out of the condo and to move on without any financial obligation.
Why the FHA Cares so Much about Condo Approval?
Many borrowers wonder why the process is so arduous with an FHA loan, but not a conventional loan. If you try to obtain conventional financing on a condo, the association will have to go through an approval process, but it is basically a quick questionnaire that they must answer accordingly. Conventional financing requires similar things, such as owner occupancy of a majority of the units, and that all units are sold, but other than that, they approve most associations unless they are in trouble. The FHA process is much more complicated because they have a lot more invested in the financing they offer. With only 3 percent down on a majority of their loans, they have a lot of money at risk when they loan to borrowers purchasing a condo.
Can you get a New FHA Condo Approval?
It is not impossible to obtain a new approval on a condo association that does not have FHA rights, but it is a long process. If you have your heart set on a certain condo association, you may have to wait until it meets all of the requirements if you need FHA financing. The basic things to look for include the need for the sale of most of the units to be complete; a majority of the units must be owner occupied; and there should not be a large amount of delinquencies on the association fees. If any of these requirements are not met, you will not be able to get the association approved and will not be eligible for FHA financing.
In general, any financing is more difficult to obtain on a condo, but FHA financing is the hardest. When you look at condos, make sure to look at the association as well as the condo itself as the association plays a vital role in your ability to get financing as well as plays a role in your success and frustration as a home owner in the future. If your association were to fall apart, you would have a harder time getting things done to the exterior or common grounds of the home, areas that you do not own. The particulars of the FHA are in place so that home owners are protected as well as so that the lenders are protected from default on the loans they provide to home-owners that purchase condos.