FHA Approval for Condo HOA -- good or bad idea?

PaddyF1 (California)
Posts: 1

Posted:

Hello wise and experienced folks,

Our HOA (townhouse condos) is currently not FHA approved.

Recently, a homeowner who wanted to refinance a loan requested that our HOA seek FHA approval.

For those who have been through the process, is FHA approval in general a good or bad idea?

Our HOA meets the obvious HUD qualifications, but is there a concern that an influx of HOA buyers would be a negative impact?

For example, the stats I've seen show FHA loans have a higher default rate than most conventional loans. FHA loans tend to be sought by buyers who have lower income and/or less than stellar credit ratings. On the other hand, it does open up a home buying market to people who might not be able to buy a home in their current circumstances.

So is being FHA approved a noticeable plus, minus, or neutral thing?

Thanks for any guidance.

RichardP13 (California)
Posts: 3,868

Posted:

Having worked in the mortgage industry for a few years, I will lend my two cents.

First, it isn't the association responsibility to get it FHA certified, let the lender or broker doing the loan to do it, as they are the ones benefiting. Otherwise, the association should screen any new homeowner on their willingness or ability to pay HOA dues.

While the credit scores for FHA loans might be lower than a majority of conventional loans, there are three things that set them apart, 1) they must provide FULL documentation of their paperwork, no liar loans, 2) the underwriters are much more qualified than normal conventional underwriters and 3) they pay mortgage insurance.

The market crash of 2007-2008 was not due to subprime, but to the lack of required documentation on loans and allowing AIG to insure all MBS loans (not putting all your eggs in one basket).

Your biggest worry should be buyers coming in using your complex as an investment tool. The next someone could be using your complex as the next tax write-off on their tax return. As we found out recently, it is good business to have real estate losses.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Another 2 cents.
Much depends on the condition of the property.

Example. Around 5 years ago, we had an original owner who did little to maintain the exterior of his property. Rather than fix the place, he did a cosmetic patch-up (without prior HOA approval) and put the house up for sale.

Our concern was - If a buyer is going to be stretched financially just to buy the house, then how long will the HOA have to wait before the new owner can afford needed repairs?

Sikubali jukumu. Read all posts at your own risk.

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By NpS on 05/09/2019 10:47 AM
Another 2 cents.
Much depends on the condition of the property.

Example. Around 5 years ago, we had an original owner who did little to maintain the exterior of his property. Rather than fix the place, he did a cosmetic patch-up (without prior HOA approval) and put the house up for sale.

Our concern was - If a buyer is going to be stretched financially just to buy the house, then how long will the HOA have to wait before the new owner can afford needed repairs?

HOW would you even know the financial condition of the buyer?

TimM11
Posts: 354

Posted:

The average price of the homes in your HOA could be a factor since FHA mortgages are capped at a certain amount that varies by location (which you can look up at https://entp.hud.gov/idapp/html/hicostlook.cfm).

Personally, I used an FHA mortgage to purchase my home, as have many other people in my HOA. In some ways, there's more vetting for them than there is for other kinds of mortgages -- that's the tradeoff to buyers for the lower down payment. Plus, from a seller POV, FHA approval is extremely beneficial since it increases the pool of potential buyers.

Generally speaking, we've had more issues in my HOA with investors than we have homeowners, and another advantage of an FHA mortgage to the HOA is that the buyer has to live in the home to qualify (though I'm sure some break this rule).

PatJ1 (North Carolina)
Posts: 568

Posted:

Posted By RichardP13 on 05/09/2019 10:28 AM
Having worked in the mortgage industry for a few years, I will lend my two cents.

First, it isn't the association responsibility to get it FHA certified, let the lender or broker doing the loan to do it, as they are the ones benefiting. Otherwise, the association should screen any new homeowner on their willingness or ability to pay HOA dues.

This changed a few years ago. Presently the HOA or MC applies to have the entire community FHA approved.

RichardP13 (California)
Posts: 3,868

Posted:

I owe a management company, I don't process applications for FHA approval.

CathyA3 (Ohio)
Posts: 6,299

Posted:

My community is FHA approved. The developer did the paperwork to get initial approval, and the association has maintained the certification since then.

As others have noted, whether it's a good thing or not depends on the nature of your community and its target market. Buyers of modestly priced homes tend to be more interested in FHA loans, whereas cash buyers don't care.

FHA has a rental cap, which can float depending on the housing market. Currently it's 50% - if fewer than 50% of the community's homes are owner occupied, then the community is not eligible for FHA financing. During the last housing downturn, the cap was either 25% or 35%, so communities that were previously approved lost their certifications. Many people consider communities that are primarily owner-occupied to be more attractive to buyers, so for them FHA certification is a good sign.

In addition, there are a number of other things that FHA looks at, including adequate reserves, acceptable (low) levels of delinquencies, and acceptable levels of insurance.

As you can tell, FHA certification requires a level of financial health and good management, and this encourages boards to get their acts together and keep it that way. So that's a plus.

I've also never heard anyone say that FHA certification is a bad thing, unless maybe you believe that it allows buyers who are at greater risk of foreclosure if the economy goes bad again. It may be worth checking to see if there are any statistics that confirm or deny this.

RichardP13 (California)
Posts: 3,868

Posted:

As Cathy pointed out, FHA does more of risk assessment than a more conventional lenders. As a buyer who would you want watching your back?

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By PatJ1 on 05/09/2019 12:24 PM

Posted By RichardP13 on 05/09/2019 10:28 AM
Having worked in the mortgage industry for a few years, I will lend my two cents. First, it isn't the association responsibility to get it FHA certified, let the lender or broker doing the loan to do it, as they are the ones benefiting. Otherwise, the association should screen any new homeowner on their willingness or ability to pay HOA dues.

This changed a few years ago. Presently the HOA or MC applies to have the entire community FHA approved.

PatJ1 is correct. See https://themortgagereports.com/16161/fha-approved-condos-fha-mortgage-rates and https://entp.hud.gov/idapp/html/condlook.cfm, among other sites.

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By AugustinD on 05/09/2019 3:27 PM

Posted By PatJ1 on 05/09/2019 12:24 PM

Posted By RichardP13 on 05/09/2019 10:28 AM
Having worked in the mortgage industry for a few years, I will lend my two cents. First, it isn't the association responsibility to get it FHA certified, let the lender or broker doing the loan to do it, as they are the ones benefiting. Otherwise, the association should screen any new homeowner on their willingness or ability to pay HOA dues.

This changed a few years ago. Presently the HOA or MC applies to have the entire community FHA approved.

PatJ1 is correct. See https://themortgagereports.com/16161/fha-approved-condos-fha-mortgage-rates and https://entp.hud.gov/idapp/html/condlook.cfm, among other sites.

Are you saying, HOA's are REQUIRED to have their complexes FHA approved?

AugustinD
Posts: 5,144

Posted:

I am saying, "PatJ1 is correct. See https://themortgagereports.com/16161/fha-approved-condos-fha-mortgage-rates and https://entp.hud.gov/idapp/html/condlook.cfm, among other sites."

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By AugustinD on 05/09/2019 5:49 PM
I am saying, "PatJ1 is correct. See https://themortgagereports.com/16161/fha-approved-condos-fha-mortgage-rates and https://entp.hud.gov/idapp/html/condlook.cfm, among other sites."

In ten years and over 100 HOA's, I have never done one. I don't see doing any in the future.

LetA (Nevada)
Posts: 2,679

Posted:

You should worry about having more renters than owners. New owners will have a hard time getting financed in an HOA that has a high amount of rental properties.
Mortgage lenders send HOA'a a letter asking for this data.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

High rental also effects refinance rates as well as finance options. Without FHA loans available it can slim the potential pool of potential buyers. There are always positives and negatives with any loan programs. FHA is a bit tighter ship in requiring to know the "health" of a HOA. They have a form the HOA has to fill out with about 25 questions. Which includes things like rental %, liens, foreclosures, or potential lawsuits. Also if it's "Fee simple". The seller/buyer don't see this form. The HOA is responsible. (President). Other loan programs are adopting this form as well to assess HOA's health prior to loan approvals.

Former HOA President

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 05/09/2019 11:03 AM

Posted By NpS on 05/09/2019 10:47 AM
Another 2 cents.
Much depends on the condition of the property.

Example. Around 5 years ago, we had an original owner who did little to maintain the exterior of his property. Rather than fix the place, he did a cosmetic patch-up (without prior HOA approval) and put the house up for sale.

Our concern was - If a buyer is going to be stretched financially just to buy the house, then how long will the HOA have to wait before the new owner can afford needed repairs?

HOW would you even know the financial condition of the buyer?

We don't.

But consider a $275k house that sells for $200k because of its condition. With an FHA loan, buyer only needs to come up with $7k. Fine if the buyer has sufficient funds to do the needed repairs in a timely fashion and if the housing market doesn't collapse again. But what if that's not the case. Bigger headaches for the HOA.

The mortgage meltdown that we went through a decade ago left some scars that we wouldn't want to go through again.

Sikubali jukumu. Read all posts at your own risk.

TimM11
Posts: 354

Posted:

You can do a 3% down payment or maybe even less on some conventional mortgages these days, though. Moreover, if buyers spend less money on a down payment upfront, that gives them more money for improvements and upkeep. If they spent all their money on the down payment, they would be in a worse position to do that.

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By NpS on 05/10/2019 4:14 AM

Posted By RichardP13 on 05/09/2019 11:03 AM

Posted By NpS on 05/09/2019 10:47 AM
Another 2 cents.
Much depends on the condition of the property.

Example. Around 5 years ago, we had an original owner who did little to maintain the exterior of his property. Rather than fix the place, he did a cosmetic patch-up (without prior HOA approval) and put the house up for sale.

Our concern was - If a buyer is going to be stretched financially just to buy the house, then how long will the HOA have to wait before the new owner can afford needed repairs?

HOW would you even know the financial condition of the buyer?

We don't.

But consider a $275k house that sells for $200k because of its condition. With an FHA loan, buyer only needs to come up with $7k. Fine if the buyer has sufficient funds to do the needed repairs in a timely fashion and if the housing market doesn't collapse again. But what if that's not the case. Bigger headaches for the HOA.

The mortgage meltdown that we went through a decade ago left some scars that we wouldn't want to go through again.

The meltdown was not due to FHA loans or subprime loans. It was due to lack of documentation to get the loan in the first place (liar loans).

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 05/10/2019 8:29 AM

Posted By NpS on 05/10/2019 4:14 AM

Posted By RichardP13 on 05/09/2019 11:03 AM

Posted By NpS on 05/09/2019 10:47 AM
Another 2 cents.
Much depends on the condition of the property.

Example. Around 5 years ago, we had an original owner who did little to maintain the exterior of his property. Rather than fix the place, he did a cosmetic patch-up (without prior HOA approval) and put the house up for sale.

Our concern was - If a buyer is going to be stretched financially just to buy the house, then how long will the HOA have to wait before the new owner can afford needed repairs?

HOW would you even know the financial condition of the buyer?

We don't.

But consider a $275k house that sells for $200k because of its condition. With an FHA loan, buyer only needs to come up with $7k. Fine if the buyer has sufficient funds to do the needed repairs in a timely fashion and if the housing market doesn't collapse again. But what if that's not the case. Bigger headaches for the HOA.

The mortgage meltdown that we went through a decade ago left some scars that we wouldn't want to go through again.

The meltdown was not due to FHA loans or subprime loans. It was due to lack of documentation to get the loan in the first place (liar loans).

Lack of documentation was a symptom, not a cause. Packaging tranches of mortgage backed securities and dumping them on the market with absurd valuations is what triggered the liar loan phenomenon.

Many people wound up with no equity in their homes. Others found that they couldn't fix their houses because they couldn't get home improvement loans anywhere near what they expected based on purchase price.

Through it all we wound up with 2 houses that became HUD controlled. Wouldn't want to go through that again. We got screwed by PA's 6-month recovery laws.

Not saying that it was any different with other lenders in control, but we're not in a hurry to become FHA approved.

Sikubali jukumu. Read all posts at your own risk.

RichardP13 (California)
Posts: 3,868

Posted:

Packaging tranches of mortgage backed securities and dumping them on the market with absurd valuations is what triggered the liar loan phenomenon.

I was a Financial Analyst with Countrywide Financial and was there when this all took place. The liar loans in those packages caused a meltdown. Allowing AIG to insure all these MBS's was a huge problem. Allowing homeowners to strip away their equity with less than desirable documentation in a way over-valued market didn't help.

Real Estate agents were never charged with any blame in over inflating a market. The value of real estate is what someone is willing to pay another person. Getting an industry (appraisers) to bo along with this scheme was a problem also.

NpS (Pennsylvania)
Posts: 4,216

Posted:

agreed

Sikubali jukumu. Read all posts at your own risk.

GenoS (Florida)
Posts: 4,276

Posted:

Quote:

Posted By RichardP13 on 05/10/2019 12:08 PM
I was a Financial Analyst with Countrywide Financial and was there when this all took place. The liar loans in those packages caused a meltdown.

But Coutrywide invented a program called "The Hustle" which stripped away most of the safeguards that had been in place to help prevent liar loans and mortgage fraud. But you apparently know nothing about that.

When a Countrywide apologist says A, you can bet on B every time.

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By GenoS on 05/11/2019 12:28 PM

Posted By RichardP13 on 05/10/2019 12:08 PM
I was a Financial Analyst with Countrywide Financial and was there when this all took place. The liar loans in those packages caused a meltdown.

But Coutrywide invented a program called "The Hustle" which stripped away most of the safeguards that had been in place to help prevent liar loans and mortgage fraud. But you apparently know nothing about that.

When a Countrywide apologist says A, you can bet on B every time.

What program was that? Or are you just making crap up?

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By GenoS on 05/11/2019 12:28 PM

Posted By RichardP13 on 05/10/2019 12:08 PM
I was a Financial Analyst with Countrywide Financial and was there when this all took place. The liar loans in those packages caused a meltdown.

But Coutrywide invented a program called "The Hustle" which stripped away most of the safeguards that had been in place to help prevent liar loans and mortgage fraud. But you apparently know nothing about that.

When a Countrywide apologist says A, you can bet on B every time.

On second thought, it ONLY shows your ignorance of how loan programs are actually created.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

I remember my first loan was with Countrywide... or was supposed to be. Made 1st month payment and then it was sold off to another company. I was WTH? Found that to be the "norm" during that time. You would finance and do all the closing with 1 company just to see it sold off to another. No mention this was the intent or possibility. Lesson learned.

My 2nd house loan did an 80/20. All seemed well until I got bit on the 20... Seems they told me it was going to be a fixed rate but different than the 80. What did not know was that it was NOT a fixed rate. That 20 ballooned so high in 6 months that was forced to refinance it to a fixed rate. I could just imagine those who did 100% variable rate loans.

That is about the time the "bubble" broke. My plans of flipping my 2nd home turned into moving into that home.

Former HOA President

RichardP13 (California)
Posts: 3,868

Posted:

Depends on when the loan was done. If after 2000, the 20% would have been a HELOC, by definition, a variable loan. You would have signed two Notes, one for the first mortgage and one for the second, outlining the exactly terms. I am sure you read and understand everything, and probably had your lawyer with you.

In your closing documents would have been a one page document that you would have signed and acknowledge that your loan was going to be sold to another servicer.

BTW, for your information, Countrywide had 346 loan programs available to homeowners.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Again... If you are "New" to how loans/mortgages work you don't understand everything. Yes, I did review my documents. However, I asked multiple times "What is the possibility or likelihood of this loan being sold?". Countrywide assured me that it wouldn't be any time soon. Switch and bait...

I was completely untrusting of the mortgage industry at that time. It was hard to get the type of loan and rate. Wanted just a basic conventional loan fixed rate 30 year etc... They were shoving so many loan programs at me I was like "Give me what I want". Seriously, there were some serious questionable loan offerings I didn't know to laugh or cry...

Former HOA President

RichardP13 (California)
Posts: 3,868

Posted:

Very same thing could be said about people "NEW" buying into an HOA.

Being "NEW" to mortgage why would you even ask if the loan was going to be sold. Do you have any idea why this practice existed?

RichardP13 (California)
Posts: 3,868

Posted:

Back to the original topic, communities were approved for FHA loans based on paperwork submitted by the developer/declarant. They needed as many loan programs available to sell their homes. Everyday a home remained unsold cost them money. HOA's or management companies are under no obligation to continue that as they have no financial interest in the loan process. I have been asked many times to get HOA's approved by lenders or real estate agent, but have turned all of them down, as instructed by the Boards.

From 2000-2008, Countrywide had a partnership with KB Homes where the retail loan officers of Countrywide would work onsite with KB Homes Sales Team to offer homeowners financing options. They were under no obligation, but it made it easier for those "NEW" to the process.