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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2010

FHA Loans Offer Opportunity and Challenges

It's important to know FHA's rules and regulations -- and how condos fit in

With their government-backed insurance guarantee, Federal Housing Administration (FHA) loans are one of the only options left for many borrowers because of heightened credit requirements for conventional loans. For those looking to buy condominiums, however, FHA loans are harder to get.

FHA loans are a huge and growing part of the mortgage industry. In 2006, FHA market share for new and existing homes was only 3.77 percent. That has increased to 19.72 percent this year, according to U.S. Department of Housing and Urban Development (HUD) projections.

Several features of FHA loans make them more attractive to today's buyers. The FHA has increased maximum loan amounts to $729,750, based on the borrower's geographic region. This past September, Congress extended the increase through next September.

Many condo-sellers and -buyers are being stopped by a little-publicized but powerful change in FHA loan regulations, however. Since this past February, the option of "spot approval" -- in which a single unit in a condominium development without FHA approval is purchased with an FHA loan on a case-by-case basis -- has been removed..

Now, condo associations must seek and receive approval before FHA loans can be used.

This change is frustrating many buyers and sellers who would otherwise be ready to move ahead with their transaction. Mortgage brokers and originators have a great opportunity to connect with their clients and explain how these loans work and the importance of doing due diligence on properties that can actually accept them. Helping condo associations and real estate agents get beyond misconceptions about FHA loans also can increase a broker's business.

Take time to explain how the FHA underwriting process works. Go into detail about FHA loans' full-documentation requirements, which ensure borrowers can afford the property in question. Point out that the required income-and-asset reporting that the FHA demands helps lower foreclosure rates; this also should make you feel good about the product you're selling to clients.

Recall, however, that a mortgage is only as good as its ability to get buyers into a home. When those homes are condos, brokers must explain additional details to all parties involved. Some of those details and exceptions to the rules can be found in HUD Mortgagee Letter 2009-46 (sctsm.in/HUD0946).

As a mortgage expert, you have the opportunity to educate clients about the benefits of FHA loans. An even greater opportunity exists when you can help clear the hurdles FHA places in front of condo financing.


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