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Emily Alderin, Real Estate Pro in 60630

What are the pros and cons of getting a condo building to get FHA approved?

Asked by Emily Alderin, 60630 Thu May 27, 2010

I was wondering if you would be able to inform me on getting a condo building approved for FHA loans. The issue I am having is a few board members think it would be a bad thing to get the building FHA approved because it would drive down prices and bring in “bad” neighbors. What are the pros and cons?

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Times have changed and in our current environment the majority of buyers go with FHA which means they put 3 ½% down, conventional loans start at 5% down so there isn’t much difference there. Since the down payment on a FHA loan is less, the other guidelines the applicant must meet are more stringent. Meeting the criteria to get a loan these days, any kind of loan is very difficult. The pendulum has swung the opposite way. Since FHA loan applicants have to meet the same income requirements if not more I see no downside to having your Condos FHA approved. By not doing it you’ll shut out a large group of buyers in a market where buyers are hard to come by. Fewer buyers mean lower sales prices………….
0 votes Thank Flag Link Wed Apr 13, 2011
Hi Emily,

I am on the board of my association and being a Mortgage Banker I urged them to get the building FHA approved. Those concerns are common. Regarding the values going down, the effect will be the opposite. The prices are determined by the principle of supply and demand. If your condo is FHA approved, 100% of the people looking for a condo can buy it, giving the seller more negotiating power. If it is not FHA approved, my guess is that only 45% of the eligible condo buyers can buy it so the buyers have the negotiating power.

Regarding attracting bad buyers, FHA has raised their standards, but even though it is easier to get qualified, 5 years ago, we were giving sub-prime loans to people with one day out of bankruptcy, lower credit scores, tons of collections, etc, and the condo boards didn't care.

If I were a buyer buying with a conventional mortgage I would still look for FHA approved condos as I know HUD has scrutinized their finances carefully.

Roberto Interiano
Sr. Mortgage Banker
Chicago Bancorp
312-738-6349
http://www.chicagomortgageexpert.com
0 votes Thank Flag Link Sun May 30, 2010
The quality of your neighbor is not dictated by what type of financing they use and how much they put down. The condo board should be careful not to violate equal housing laws when making decisions. This could bring big trouble to the board should a potential buyer decide to probe into the decision making behind pursuing FHA approval, even if there is no intent to violate the law.

That said, in the current market FHA is one of the easiest and least expensive ways to finance a home. If a unit owner has no intention of selling in the near term or refinancing, it's easy to see why they may be apathetic to the issue. Individuals with a negative perspective regarding FHA financing need to understand the facts. Foreclosure happens to conventional and FHA programs alike.

As to Matt's commentary regarding the FHA's philosophy "wreaking havoc" on the programs they offer, Fannie Mae and Freddie Mac are in very similar straights. I agree that the HUD and the FHA are struggling to get a firm footing in this economy and looking at raising cost to get there. So is every investor in the Real Estate Market that was actively investing in prior to 2009. As an economy, the country is having systemic problems with debt and it's fundamental structure. Homeownership and the opportunity to own real property is one of the fundamental building blocks of a sustainable economy. We can't let the horrible loan programs, derivatives markets and out of control speculation over the past 10 years discourage real property ownership. As mentioned, Fannie Mae and Freddie Mac we're both offering products that did not require any money down. Furthermore, they were not considering the capacity of the buyer to repay the loan, and placed people in homes they could never afford. This is much more difficult to do with an FHA loan since they do look at income, debt, credit, etc. Bottom line FHA financing is a healthy option for condo buildings. Condo boards should focus on managing the current situation effectively and not trying to create controversy. Worrying about "bad" neighbors that haven't bought yet is interest paid on debts that may never come due. The perception that FHA will bring in "bad" neighbors is based on fear and myth.

Wayne Beals
Realtor
Keller Williams CCG
312-77BEALS
312-772-3257
wbeals@kw.com
0 votes Thank Flag Link Sat May 29, 2010
I dont think "bad" neighbors is really an ethical comment.

In this market, I only see pros. Lets face it, themajority of condo buyers are FHA buyers. So if your not FHA, your losing prospects.

Matt Laricy
Americorp Real Estate
Brokers Associate, e-PRO
mlaricy@americorpre.com
708-250-2696
0 votes Thank Flag Link Fri May 28, 2010
Emily...Here's the pro:
1. Bringing more people into the "buying pool" will help raise the market value of your homes, which is desperately needed today, especially in the condo market.
2. Bad neighbors? I disagree. Here's why:
a) Most lenders insist on a minimum of a 640 credit score...some allow 620, others 660. A few short years ago 620 was considered a good score. Also, lenders insist on at least 3 credit tradelines (credit cards, installment loans, etc) reporting on the credit report for at least 1 year with good pay history. You can't have had a BK in at least 2 years and no FC in at least 3. And there cannot be any derogatory pay history after the BK or it's "no dice".
b) Borrower must have a good employment history and fully verifiable income and although FHA may allow for a higher DTI (debt to income ratio) you must realize that underwriting today is much stricter than it was 3 years ago. It is difficult...very difficult to get an FHA DE underwriter to give credit for income that is not part of the borrower's base salary (such as bonuses, overtime, car allowance, etc). Even commissions are deeply scrutinized.
c) FHA only finances loans for people who are going to reside in the condo. The do not finance investors. So, altho the borrower need only put down 3.5%* (more about that later) at least they will be living in the unit and not renting to just anyone who will pay rent. *Yes, the 3.5% can come from a "gift". BUT, the gift must come from a family member. I'm thinking not many people are going to give someone even $3500 if they don't think it's a good risk.

The con:
1. Without FHA as an option, the person who can buy a condo has to have at least 5% (and in most cases 10%) to put down. Also, they typically have a much better credit score (660+). Obviously, that makes for a better risk...not necessarily a better neighbor...a better risk.

For more info, please feel free to contact me at ncoleman@envision3m.com or call me at 708-597-8884. Neil Coleman
Web Reference: http://www.envision3m.com
0 votes Thank Flag Link Fri May 28, 2010
Emily,

I agree with both Evelyn and Mark.

I also disagree with both Evelyn and Mark.

Condo board members could easily make the argument that all of Evelyn's "pros" (to the buyer) are actually "cons" (to the current unit owners.)

If you owned a unit in that building, and needed to rely on the financial stability of your neighbors to protect your own investment, would you want neighbors with lower credit scores, who were relying on gift money to make a smaller down payment, and had none of their own money invested in the property? Where 55% of their GROSS income was already spoken for every month? Especially in a declining market, where there are websites that INSTRUCT you exactly how to walk away from your mortage?

Or would you want to make sure that the people buying into your building, your HOME, were people with good credit, who were investing AT LEAST 5% of their own funds, who, even if they had SPECTACULAR credit, would be denied the opportunity to put their property (and yours) in jeopardy if the affordability of the condo was in questions (DTI >45%)

This doesn't make them bad people, or bad neighbors, but it certainly doesn't make them good credit risks.

FHA currently has the least restrictive financing options. This was not always the case. Up until 2008, both Fannie Mae and Freddie Mac offered 100% financing, and STILL offer programs where the entire down payment could be a gift. But once the housing market turned, they both curtailed their 100% programs, putting them on the shelf until times are better.

The FHA is slower to react, because their mandate is that ALL Americans should be given the opportunity to own their own home.

A noble idea, but this philosophy is wreaking havoc on the the FHA itself, to the point where they recently (April 5th) needed to increase their UFMIP from 1.75% to 2.25%, and is currently asking the NAR to support a proposed increase in the MONTHLY MI from .55 to 1.5%, which would hurt the very people that they're supposedly in business to help.

However, FHA loans make up half of all new mortgages, so excluding at least half of the current buyer market is going to make things much more difficult for condo owners, and almost guarantees that you'll need to price your property lower to attract those solid buyers who DO qualify.

Bottom line: You need to give the board members all the information necessary to make this decision, then respect their decision. Buyers agents also need to be given all the information on high-LTV conforming financing. The fact is that 95% financing still exists in the conforming world, and with Custom MI, is far more affordable to (well qualified) buyers than FHA financing.

Since I live in a condo in the 60630 zipcode , and our association is currently weighing these very options, if you'd like to contact me to discuss this matter further, I welcome the opportunity to speak with you or the board members.


Matt Bukovy
Senior Mortgage Consultant
Wintrust Mortgage
773-654-2498
mbukovy@wintrustmortage.com
(BTW, if the board decides to move forward, Wintrust subsidizes the condo approval process by keeping a Condo approval company on retainer.)
0 votes Thank Flag Link Thu May 27, 2010
The pros definitely outweigh the cons in this market. I think that "bad" neighbor comment is a very ignorant statement. It would widen the buyer pool and keep values stable. The approval process can be a bit tedious, but well worth the effort.

Good luck!

Mark Malave
American International Realty
p- 773-435-1605
Web Reference: http://www.markmalave.com
0 votes Thank Flag Link Thu May 27, 2010
Hi Emily,

Pro is that there will be more opportunities for and more buyers available to purchase. Pro is by being FHA approved means only a certain percentage of units can be rented vs owner/occupied, thus keeping the building "sound".

Additionally: FHA Pros:

• Allows for higher debt to income ratios. In some cases up to 55%
• Allows for lower credit scores, down to 620
• Allows a borrower to put 3.5% down
• The entire down payment can be a gift

FHA Cons:

• Condo buildings must be HUD approved.
• More documentation required from borrower

Hope this helps.
0 votes Thank Flag Link Thu May 27, 2010
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