FHA Loans -- Approved or Not Approved – That is the Question Many years ago a common question asked to community managers was “Is this project FHA approved?” My response was always the same, “I don’t know.” This common question faded into the sunset as we entered the creative financing world of the no payment loans. Conventional loans became the norm, FHA loans became obsolete. We have come full circle now, and the old question “Is this project FHA approved?” has resurfaced. FHA loans are making a comeback for two main reasons, FHA loans only require 3.5% down and the loan amount was increased to over $500,000. The items below must be completed and submitted to HUD (assuming the property meets all the criteria) before any property can be put on the approval list. CHECKLIST FOR FHA APPROVAL 1. Cover Letter – State the requested action, name and location of the condominium, description of the project including type of structure(s), number of units and common facilities; and name, address and phone number of a contact person. 2. Location Map – identify location of the condominium 3. Recorded project plat, map and/or air lot survey that adequately identifies units. 4. Condominium Legal Documents – Recorded Declaration (CCR’s), recorded Articles of Incorporation, and the signed By-laws. 5. Budget and Financial Statement – including adequate reserves for maintenance, repair and replacement of the common elements – current and previous year. 6. Minutes of the last two board meetings 7. Certification (on appropriate letterhead) from the HOA or direct endorsement lender that the project meets the 51% owner occupancy requirement. 8. Month and year completed. 9. Attorney’s Opinion Letter – stating that all the HOA legal documents have been properly filed or recorded and is consistent with legal policies set out in HUD Handbook 4265.1, Change 4, Appendix 24, and comply with all state and local laws. Items 1-8 are fairly simple and most board members or management companies can gather this information for very little cost. Item 9, the attorney’s opinion letter, is basically the item that will require some cost for an attorney to complete. The attorney will examine and give an opinion as to whether numerous aspects of the condominium documents conform to FHA guidelines. Some of the aspects include: condominium formation and legal description; association rights and restrictions, including right of entry, power to grant easements, etc., enforce assessments, reserves, and lien priority; unit owners rights and restrictions, including obligations to pay assessments, voting rights, ingress and egress, encroachments and leasing restrictions; first lien holder rights, including notices, rights of repair, and voting rights; amendments to documents; enforcement for violations; adequacy of bylaws; and insurance. Using an attorney that has completed the opinion letter before and is familiar with the process should help keep the cost lower because they have gone through the learning curve already. The website to check if your association is already on the FHA list is - www.hud.gov/groups/lenders.cfm Association’s that are not on the approved FHA list have to go through a spot approval process for every loan. Below is the spot approval checklist: CHECK LIST FOR FHA SPOT CONDOMINIUM APPROVALS 1) The legal documents of the homeowners association do not contain a first right of refusal or restrictive covenant. 2) The unit is part of a condominium regime that provides for common and undivided ownership of common areas by unit owners. 3) The project, including the common elements, and those of any Master Association, are complete, and the project is not subject to additional phasing or annexation. a) There are no special assessments pending. b) No legal action is pending against the condominium association, or its officers or directors. 4) The common areas have been under the control of the homeowners association for at least one year. 5) At least 90 percent of the total units in the project have been sold. 6) At least 51 percent of the total units in the project are owner occupied. 7) There are no adverse environmental factors affecting the project as a whole or individual unit. 8) No single entity owns more than 10 percent of the total units in the project. 9) The units in the project are owned in fee simple or the units are held under a leasehold acceptable to FHA 10) The owners association has adequate common area insurance coverage including eneral liability, replacement coverage, etc. Reflects the character, amenities and risks of the particular development. Flood and other insurance carried, where applicable. 11) General maintenance level of common elements is acceptable and there is no deferred maintenance, based on the comments by the appraiser and/or the pictures. 12) The owners association has a reserve plan and reserves fund, separate from the operating account, which is adequate to prevent deferred maintenance. The amount of the fund is $____________ as of ________________. a) For projects consisting of over 30 units, no more than 10% of the total units are encumbered by FHA insured mortgages. b) For projects consisting of 30 units or less, no more than 20% of the total units are encumbered by FHA insured mortgages. *All questions to be answered with YES or NO. Spot approvals are designed to relieve a burden on homebuyers where FHA involvement is limited. Spot approvals take more time and resources from the appraiser, the association, the management company, and the real estate agent and broker. Spot approvals can work for awhile, but eventually you might run into problems if more than 10% of the units are already encumbered by FHA loans. FHA loans for now are the only real option for low down payment loans for buyers. Conventional loans require 20% down and most buyers simply don’t have that amount of money. Understanding the process is half the battle in making an informed decision. Do the benefits to the owners, whether selling or refinancing, outweigh the cost to the Association? Is having an FHA loan easily available to potential buyers give the association a competitive advantage over another association that is not pre-approved?
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