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FHA Loans - The Answer for Buyers and Sellers
By:
Gregory Braun, Partner
Standards for loan approval have become 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 such as school transcripts and cancelled checks showing who paid off student loans and credit card balances. This tighter credit has made Federal Housing Administration (“FHA”) loans more prevalent than ever. FHA loans are an attractive source of credit 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. FHA lending gives all borrowers, especially first time buyers, a source of funding to purchase a home.
As of February 1, 2010, the FHA eliminated Spot Approvals for FHA transactions. Spot Approvals enabled lenders to underwrite one unit in a condominium building and allow that single unit to be eligible for FHA approval. 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 qualified but the association does not meet the traditional Fannie Mae/Freddie Mac (or “Conventional Financing”) requirements, an FHA loan may be the only solution.
Historically, FHA loans had been considered a relatively unfavorable method of home financing because of the complications and costs involved. However, since the retraction of Conventional Financing, FHA financing has become a necessity. Today’s market has a large number of first-time buyers who are just establishing credit and have yet to accumulate the funds for a large down payment. Even move-up buyers have had credit issues resulting from the dip in the economy and shrinking home equity. The FHA guarantees the loans banks make to their customers so that the rates offered are among the lowest available.
The FHA also provides stringent screening of condominium associations, as FHA approval requires that condominium buildings meet certain standards, such as having 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.
Many associations have been proactive in obtaining FHA approval, as FHA building approval allows sellers to attract the greatest number of potential buyers, while simultaneously keeping prices stable. Several documents must be submitted to the FHA for building approval. These documents typically include the condominium declaration and bylaws, condominium survey, budget, questionnaire and owner occupancy certification. This document package can be submitted directly to the U.S. Department of Housing and Urban Development ("HUD") for the HUD Review and Approval Process, ("HRAP") which can take six to eight weeks or more, or through a Direct Endorsement Lender Review and Approval Process ("DELRAP"), which generally takes a few weeks. DELRAP underwriters have expertise in reviewing and approving condominium projects and make sure the projects meet FHA standards. Knowledgeable condominium attorneys, like the attorneys at McCormick Braun Friman, LLC, can identify and resolve issues before submission, making sure the condominium documents conform to FHA standards. |
