Two years ago, almost no one would have thought that Federal Housing Administration-insured loans would become one of the most important sources of financing for real estate sales. Recent changes in FHA guidelines may make an FHA-insured loan a great choice for your purchase.
FHA dates back to the National Housing Act of 1934. As part of that legislation, the 30-year fixed mortgage came into being. FHA has served as an important resource for buyers for 70-plus years, and its loan programs often allowed people to purchase with little or no money down.
I remember doing my first FHA deal back in the 1970s. The property was priced at $62,000. In order for the transaction to close, the seller had to pay two points for the buyer ($1,240) plus all the normal closing costs (about 8 percent, part of which included commissions, the title policy, and the proration of taxes, interest and insurance).
In addition, FHA sent out an appraiser who could require additional repairs be made to the property. The repairs were often things that neither the seller nor the buyer considered to be important.
In my transaction, FHA required the seller to repair some minor cracking in the driveway plus a number of picky repairs that cost more than $500. As a result, it cost the seller about 11 percent of the sales price ($6,800) to close the deal or an extra $1,860. These hefty requirements made most sellers reluctant to accept an FHA transaction. If the prices were increasing, a typical ploy was to add the additional seller fees to the purchase price and hope that the appraisal came in high enough to close the deal.
With the advent of the subprime crisis, lending resources dried up. FHA was not a major player then due to the low loan limits. As a result, borrowers had to rely on loans that would meet either the Fannie Mae or Freddie Mac requirements. These requirements included a maximum loan amount of $417,000 (or as high as $729,750 in some high-cost areas) as well as certain credit score minimums and loan ratios.
The following changes have made FHA an important resource for today’s condo buyer.
1. Larger loan limits
The Housing and Economic Recovery Act of 2008 and Economic Stimulus Act of 2008 established higher loan limits — the loan limit for FHA mortgage insurance for single-family, one-unit properties now ranges up to a cap of 175 percent of the GSE limit of $417,000, for some areas.
2. Condominiums no longer funded separately from single-family residences
The challenge for condominium owners seeking FHA financing has been that FHA segregated single-family residence loans from condominium loans. A recent change to the FHA guidelines will no longer segregate owners of condominiums from those who own single-family residences. This means these loans will be easier to sell on the secondary market.
3. Relaxation of attorney review requirements
A major challenge with the old FHA rules was that buildings with 100 units or less had to hire an attorney to review the condominium documents. The attorney would have to certify that the documents met the 37-page legal standard. Even if you could find an attorney do this work, it could cost $1,000 or more. The issue for the buyer and seller: Who is responsible for bearing this additional cost?
4. Relaxed presales requirement for new projects
For years, one of the greatest hurdles facing any condominium development was meeting the “50 percent rule.” I remember selling properties in new condominium buildings and being unable to obtain financing until 50 percent of the condominiums in the building had sold to parties other than the developer. If the building was very popular, meeting the 50 percent was no issue. Even then, many lenders would refuse to fund more than 25 to 50 percent of the units in a single building. This sometimes left the developer hustling to find two lenders to fund the initial sales in the building.
Given the slow rate of sales in many buildings today, a buyer in a new project could wait months or even years to meet this requirement. The new FHA guidelines reduce the presales requirement from 50 percent to 30 percent. They do, however, continue to limit the number of FHA loans in any building to 30 percent.
These changes mean it will be easier than ever before to purchase a condominium using FHA. Check with a mortgage professional to determine whether FHA is a good option for your purchase.