What are the pros and cons to a condo building being FHA approved?

Asked by J & T, Mon Jan 14, 2013

I have just joined the Board of our loft condo complex in Atlanta and learned that our FHA approved building status lapsed last summer. Our legal counsel has advised that they don't process these apps any longer, and it could be very costly to reapply via a consulting company that handles them now. What are the pros and cons of being FHA approved? e.g., - Can the Board be held liable by an owner who seeks to refinance and cannot because we are not FHA approved? Would appreciate any/all input here.

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Lee Taylor, Agent, Decatur, GA
Mon Jan 14, 2013
BEST ANSWER
I found a good article that will help further - check the web reference and here's a copy/paste:

What are the benefits of FHA condo approval?

FHA condo approval dramatically increases the pool of potential buyers
Statistics show that approximately 60% of new home buyers intend to use an FHA Loan. If your community does not have FHA condo approval, you potentially limit the buying pool to only 40% of home buyers.
NOTE: These are “regular” buyers – an FHA loan is not associated with low income HUD programs, such as Section 8. In some counties, an FHA insured loan can reach amounts of $800,000.00 or more. Since the recession, most american buyers are using FHA insured loans, and this will be the trend for years to come.

Increased Home Value
FHA approved Condos have a larger pool of prospective buyers, therefore increasing competition and demand for the product. This can result in higher purchase prices and an increase in market value. This will increase the value of units throughout the community.

FHA Loans are Assumable
This means that in the future an FHA Loan can be assumed (including the interest rate) by a new buyer. With interest rates at an all-time low, this can be a very valuable asset to an HOA community.
Marketability
Some real estate agents won’t show units that aren’t FHA Approved. Being approved sets your community apart from others in your same area.

Awareness
Going through the FHA condo approval process gives your Homeowners the sense that you as a Board cares about the community and wants it to thrive. By avoiding the approval process it will hamper your owner’s when they go to sell their units.

Less Renters in the Community
Generally speaking, communities without FHA approval will attract buyers that can make large down payments. These buyers are usually investors who will rent out the property for a profit.

Fiduciary Duty
Board Members and Property Managers are expected to maintain property values in their communities. Several HOA attorneys advise that it is the fiduciary duty of the condo Board to apply for FHA condo approval to maintain or increase property values for residents.

What are the cons of FHA Condo Approval?
At this time, there are no “cons” to being FHA Certified. Remember, chances are that your community was certified when it was developed. Most communities in the US are currently seeking FHA eligibility, but may not meet the strict FHA guidelines, and will not qualify.

Misconceptions regarding FHA Condo Approval:

Being FHA Certified will bring in “low-income” buyers - FALSE
This is completely false. FHA Condo approval is completely unrelated to affordable housing programs. The FHA can insure loans upwards of $800,000.00 in some areas. Since the recession, most american buyers are using FHA insured loans, and this will be the trend for years to come.

FHA Loans caused the mortgage crisis – FALSE
FHA loans are not Sub Prime Loans. Although they do offer lower down payments than traditional mortgages, there are credit score requirements, debt to income analysis, and income verification. Also, in 2009 FHA loans made up about 2% of the loan market, in 2010 they were up to 40% and climbing.

The guidelines are too strict and it’s cost prohibitive – FALSE
Well managed and financially stable communities have no trouble becoming FHA approved. The cost has dropped dramatically since 2010. When the guidelines initially changed, Attorneys were charging upwards of $5,000 to review the documents. FHA Submission companies like FHA Review are able to streamline the process and charge significantly less.
3 votes
I think Lee covered it well and I agree with him.
Flag Mon Jan 14, 2013
Jeffrey S Sp…, , Atlanta, GA
Mon Jan 14, 2013
This is coming from a mortgage professional. You really want to be FHA approved as it allows for buyers to use FHA financing. This really opens up your market for more first time home buyers or people who want to take advantage of a lower down payment. You also want to ensure that your Freddie/Fannie approved. Usually if you are HUD/FHA approved you are Freddie/Fannie eligible. This is all very important in selling a unit as well, because you want to ensure that any potential buyers can obtain financing easily. Condos are very difficult to finance as it is, so any help is good help. FHA also allows for assumable rates/loans so that your next buyer can take advantage of today's rates. I do not see any disadvantages to being approved, I would consider it to be a disadvantage to not be approved..
1 vote
George, , California
Fri Jan 25, 2013
There could so many pros which my friend already mention in there answer but there are also some Misconceptions regarding FHA Condo Approval which i would like to mention here:

1.Being FHA Certified will bring in “low-income” buyers - FALSE

This is completely false. FHA Condo approval is completely unrelated to affordable housing programs. The FHA can insure loans upwards of $800,000.00 in some areas. Since the recession, most american buyers are using FHA insured loans, and this will be the trend for years to come.
2.FHA Loans caused the mortgage crisis – FALSE

FHA loans are not Sub Prime Loans. Although they do offer lower down payments than traditional mortgages, there are credit score requirements, debt to income analysis, and income verification. Also, in 2009 FHA loans made up about 2% of the loan market, in 2010 they were up to 40% and climbing.
3.The guidelines are too strict and it’s cost prohibitive – FALSE

Well managed and financially stable communities have no trouble becoming FHA approved. The cost has dropped dramatically since 2010. When the guidelines initially changed, Attorneys were charging upwards of $5,000 to review the documents. FHA Submission companies like FHA Review are able to streamline the process and charge significantly less.

Hope you like this additional information thanks!!!!!

REFERENCE(S):
http://www.findrenttoown.com/atlanta-georgia
0 votes
Robert A Whi…, Agent, Roswell, GA
Sun Jan 20, 2013
Lees copy past answer is stellar, and Timothy makes a very relevant point regarding the impact based on the price ranges in your complex.

You really should seek advice from an attorney experienced in HOA/Condominiums, and also confirm that the FHA approval actually lapsed, versus being termintated by FHA for compliance/reserve issues.


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0 votes
David Herren, Agent, Atlanta, GA
Mon Jan 14, 2013
J&T,

Lee's article sums it up very well. If your condo is FHA approved, you can attract a much larger pool of buyers. For all buyers, it demonstrates that your building has a low rate of HOA dues delinquencies, strong reserves, and meets minimum insurance requirements and other standards. All of this translates to higher property values.

Regarding your second question, you should contact a real estate/condominium attorney.

Best,

Dave Herren
Best Atlanta Properties
404-425-4945
0 votes
Tim Brown, Mortgage Broker Or Lender, Alpharetta, GA
Mon Jan 14, 2013
J&T,

The cons you already know about, namely the cost and time of getting re-approved. The benefits are covered by others below. Depending on your price point, having FHA approval could make an enormous difference in the value of each of your condo units. If condos/lofts are north of $400,000 in value, then FHA approval will not be as critical because the maximum FHA loan amount in the metro area is $346,250. If it is below $400,000, and particularly below $200,000, the value of your units will be higher if you have FHA approval as many of the buyers in this price point will rely on FHA financing to purchase their home.

Before you go down the path of getting approved, you may want to ensure your complex meets some of the basic requirements to know that you are "approvable" once you go forward with the re-cert. Things like the amount of funds in your reserve account, % of units that are delinquent on dues, number of units that are being rented, pending litigation against the complex are all things that could result in your spending the money and then not getting approved which would be the worst of all worlds.

Email me with additional questions and I would be happy to assist in any way I can.
0 votes
Susan Jackson, Agent, Atlanta, GA
Mon Jan 14, 2013
Great article Lee. No need for me to comment, as I was going to make the same points,regarding the FHA Loans in today's market
0 votes
Dale Arnold, Agent, Atlanta, GA
Mon Jan 14, 2013
Not being FHA approved can result in many buyers not being able to purchase in the complex. I get many calls for my condo listings and the first question is often "is it FHA approved?".
I don't know all of the qualifications for a complex to be FHA approved, but I have learned that it's an effort and expense needed by the management company and/or HOA board. Laziness or oversights can result in losing this status.

It's also my understanding that no all complexes can be approved if there's a high rate of HOA fee delinquencies.

The question about being held liable on refinances, I would recommend you speak with a real estate attorney and/or possibly a mortgage company manager.
0 votes
Fred Yancy, Agent, Woodstock, GA
Mon Jan 14, 2013
If your building is not FHA approved, then any new buyers cannot use an FHA loan to purchase a unit. This drastically decreases the amount of potential buyers which will make it much harder for you to sell your property when the time comes.
0 votes
Isabel Elses…, Agent, Alpharetta, GA
Mon Jan 14, 2013
If it is FHA approved that mean you can sell unit using the most popular form of financing FHA.
Very good option to have.





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