FHA financing once was frowned upon, but no longer
As anyone who has attempted to obtain mortgage financing to buy a condominium recently knows, it isn't easy.
Once a significant player in the housing market, the FHA has returned with a vengeance. Requiring only 3.5 percent down opens up the housing market to a lot more people than conventional loans.
At one time, there was a stigma to FHA financing, based upon the urban myth that only "undesirables" were seeking FHA approval. Realtors would historically seek out FHA-certified lenders, and try and obtain approval for their customers. If the association had a right of first refusal, it would halt the process dead in its tracks. Many associations spent time and money trying to amend their documents to remove this pre-emptive right of the board from their declaration. FHA did spot financing and had a restriction against lending to buyers in associations that had a right of first refusal.
The rules of the game have now changed.
According to Chris Gardner of FHA Pros, a company that specializes in FHA approval for associations, "there are many benefits to government financing and if conventional lenders had been following FHA lending rules and loan limits, they could have avoided the mess we are in now."
As of Feb. 1, FHA spot financing is no longer available. Condominium and homeowners associations must now be certified as a community. Illinois law has also been recently amended to accommodate the FHA rules to provide that no association can exercise a right of first refusal, or disapprove a sale on the basis of a purchaser who obtains an FHA-guaranteed loan (Section 22.2 Illinois Condominium Property Act, 765 ILCS 605/22.2).
There are many benefits for a condominium or homeowners association to seek FHA certification:
• Interest rates are lower than conventional loans.
• FHA loans are fully assumable. Any seller can offer this to a potential purchaser. With rates invariably destined to rise, the buyer can assume the same rate as the seller by qualifying and then assuming the seller's original loan.
• FHA loans require the owner to occupy the property and provide full income documentation. For a community plagued by problem renters and/or bad investor owners, purchasers will now have a stake in the community. For associations that are unable to pass a leasing restriction amendment, this may be one way around this problem.
• An association can have up to 50 percent rentals so long as large blocks of units are not owned by a single owner.
• FHA is administered by the Department of Housing and Urban Development. HUD allows a purchaser or refinancing owner to apply for the FHA 203K loan. Not only is this loan government insured, but it provides that money used for rehabilitation of a property will defer payments for six months, and the rate is fixed as opposed to a home-equity loan, where the rate varies contingent upon the market.
One of the causes of the recent financial debacle was that totally unqualified people obtained mortgages to buy homes, and some of them even received approval for a loan that was more than the underlying value of the property they were buying. Conventional lending institutions and developers could not qualify these people fast enough because they would turn around and sell the paper to a willing buyer, who then repackaged it and sold it again. Most of these loans had adjustable rates, so as rates rose and homebuyers could no longer afford their payments, they walked away from the property, leaving the bank to foreclose, and leaving all the lenders holding worthless securities. Associations had to write off a large delinquent balance for each unit in default.
The question is do you know if your association is FHA approved? Most associations and property managers have no idea, but it is relatively easy to find out. If your association has been FHA approved in the past, it is likely that since the inception of the new rules, that certification has expired. Further, under the new guidelines it must be recertified every two years.
The process can be complicated and mired in paperwork without the assistance of a qualified professional. Further, it also requires a legal review of the documents and certification by the association attorney.
Clearly, the value of a property is contingent upon the owners' ability to sell their home at a fair price to a buyer who has no difficulty obtaining a mortgage. This makes for a smooth closing and reduced stress levels for everyone involved.
The biggest investment most people make in a lifetime is in their personal residence. Whether it is a $100,000 condominium in a vintage apartment building converted to condominium, or a row house with no land, it is still their home. If the American dream is for each person or family to own their own home, it is the duty of every association to remove any obstacles to make that happen.
The by-product of this philosophy will be to enhance the property values of all owners' homes in the community. Many people will have questions about the new law, and should consult with their attorneys or feel free to contact me at the e-mail address included here.
• Jordan Shifrin is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions to him at jshifrin@ksnlaw.com. This column is not a substitute for consultation with legal counsel. Past columns can be read at www.ksnlaw.net.