Did You Hear The One About FHA Approval?

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Here comes a rant. The title above implies a joke is coming…it is! In September I wrote a post about the difficulty of buying a single family house using an FHA loan. Hilariously, I thought that was difficult! Silly me! Wait until you see what it’s like buying a condo around here using FHA!

Here’s the thing, up until about a year or so ago FHA didn’t really exist around these parts. The mortgage meltdown and the pounding that Fannie and Freddie took brought about a new era of lending to folks who had less than 20% down and the burden of that fell onto FHA. FHA backed loans are possible for all of those folks, but if you’re a buyer and you have less than 10% down you’re certain to need an FHA loan. It’s certainly understandable that FHA would have strict criteria since the risk is greater with buyers who have 5% or less down. Often the process is daunting to say the least to qualify for one of these loans. The appraisals, for one thing, are much more rigid than conventional loans and often seem to be more like inspections. If there’s an outstanding problem the deal could easily be at risk. Consequently, many listing agents are fearful of buyers with FHA loans since the risk to their seller is so much greater. If a seller has a choice between a buyer with a conventional loan and one with an FHA loan they almost always take the conventional buyer.

Well, we now have a new and more painful twist. For condo/townhouse buyers, FHA prefers to loan on projects that are approved in advance by them. Since FHA is almost new to this area there are very, very few projects that have gone through their process and have been approved. In Foster City, Marina Point is the only approved project. In Redwood Shores, none of the projects have been approved. It’s like that in most of the Peninsula communities…and why not? FHA is new to the Peninsula…their approval was never important before.

FHA has, up until now, allowed a “spot” approval process that made an exception for condo and townhouse projects that were not on their official list and thus local buyers with less than 10% down could actually purchase a home here. As of February 15, however,  FHA has scrapped the “spot” approval program. If you want to buy a condo at the Admiralty, or a townhouse at Nantucket Cove for example, the whole project will need to go through the approval process before you can close. Depending on who you talk to that could take months…if they do it at all. I also heard today that the process will require that HOA’s change their master insurance policies to cover interior walls…a level of coverage that hasn’t been required before.

What does this all mean? I’m thinking it could mean that FHA is taking first time condo/townhouse buyers with less than 10% down out of the marketplace all together. It means that if you have a condo at the Admiralty and want to sell, the pool of prospective buyers just got alot smaller. If you’re a seller and an offer comes in with an FHA loan, why would you want to consider it at all? If this insurance issue is correct, why would any HOA want to be approved at all? It also means that if you’re a buyer…you better save enough for a 10% minimum down payment so that you can qualify under a conventional loan. For what it’s worth, here’s a website that allows you to check, by town or zip code, approved condo/townhouse projects. If it shows “error” that means there are none in that area.

https://entp.hud.gov/idapp/html/condlook.cfm

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