As published in Scotsman Guide's Residential Edition, March 2012.
Because Federal Housing Administration (FHA) financing accounts for a large percentage of the first-time homebuyer market — and condominiums are popular with first-time homebuyers — it’s essential for mortgage brokers and originators to be aware of the significant condominium policy and procedural changes that have been implemented by the FHA in the past few years.
More important, brokers and originators must be aware that, at the present time, there are hundreds of previously FHA-approved condominium projects that have failed to submit the required documentation to get recertification. The end result is that their FHA approval has expired, thus preventing current owners from selling their units to borrowers who are seeking FHA financing — even if those owners have FHA-insured loans on their properties. By partnering with homeowners associations (HOAs), developers and other parties to get these approvals, mortgage professionals could open up a significant new source of business.
On the Web ___________________________
To see the impact that the FHA’s policy changes have had on condominium projects in your state, follow these four steps:
1. Visit FHA’s website: www.fha.gov.
2. Click on “Search for FHA-approved condominiums.”
3. Enter your state under the appropriate drop-down box.
4. The condominium projects that have had their FHA-approval status expire will be noted as such in the right-hand column.
Before outlining the current procedures for getting FHA approval and recertification of a condo project, it’s helpful to understand the policies and procedures that were in effect before 2009, when obtaining FHA financing for a condominium unit was comparatively easy. What occurred in 2009 was essentially the elimination of the spot-loan process, as implemented by the FHA in 1996.
Under this process, mortgage lenders could originate and underwrite an FHA-insured loan transaction on a condo unit that was located in a project that did not have previous FHA approval. Lenders were instructed to address a number of items on a suggested checklist and, if everything was found to be acceptable, those lenders could close the loan and have it insured without the project itself being approved.
As a result, many condo units got FHA insurance when, in fact, the project in which they were located had substantial problems — enough that these should have rendered the project ineligible for FHA financing. These problems likely would have been uncovered with a more in-depth review of the project’s legal and financial documents, as is now required under current procedures.
Upon issuance of Mortgagee Letters 2009-46(A) and 46(B), the FHA effectively eliminated the spot-loan process. As a result, lenders were advised that, on purchase transactions, FHA financing on a condo unit only would be available if the project was on the FHA’s approved list.
In this regard, condo projects now can be approved by two methods: the U.S. Department of Housing and Urban Develop-ment (HUD) Review and Approval Process (HRAP), and the Direct Endorsement Lender Review and Approval Process (DELRAP). One of these two methods also must be used to process annexation requests, as well as recertifications.
All project approvals from the FHA expire two years from the date of their placement on the list of approved condominiums. Although this policy has been in effect for many years, HUD Homeownership Centers (HOCs) lacked the resources to perform substantive project recertification reviews for each and every previously FHA-approved project, especially because HOCs simultaneously had to perform approvals for projects that were already in place.
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