Most home sales go through without a problem, but there’s always a chance that you’ll hit a snag somewhere along the line. Many of these snags are minor irritants, but some can be downright disappointments.
Few disappointments compare to falling in love with a condo only to learn that the community isn’t HUD approved, which means you can’t use your FHA-backed loan for the purchase.
If you’re working with the right real estate agent, this shouldn’t happen. He or she should check the condo complex’s approval status before even showing you the home.
But when it does happen, it can leave you, the buyer, dazed and confused. Let’s examine what FHA requires of condo buyers and how that differs from its single-family home requirements.
The Basic FHA Requirements
Lenders’ jobs are tough, especially when it comes to buyers using FHA-backed loans to buy a condo. Not only must the lender determine whether the borrower is a decent credit risk, but it must also take into account the risk of loaning money for a home that is under a homeowners’ association. Regardless of your credit worthiness, if the HOA has problems, the lender and/or FHA will deny your loan.
Some HOA problems that FHA frowns upon include:
- A high number of rentals in the community. FHA rules demand that, at minimum, 50 percent of units must be occupied by the homeowner. In 2016, HUD changed the minimum to 35 percent, under certain circumstances. Learn more about those circumstances at HousingWire.
- The homeowner association fee delinquency rate must be lower than 15 percent of the budget.
- No investor/entity may own more than 50 percent of the units in the community, but only if half of the units in the community are owner occupied. So, if Warren Buffet or some random Saudi Prince decides to snatch up 52 percent of the homes in a condo community, the complex will be denied HUD approval.
- FHA will not guarantee loan repayment on a condo community that is in litigation. Once the litigation is settled (which can take years), the community can be considered for certification. Litigation examples run the gamut from the HOA suing the developer for construction defects to the famous cases of homeowners suing the HOA for the right to fly an American flag or the proper disposal of pet waste.
- The HOA’s cash reserves must be equal to or in excess of one year’s worth of association fees. FHA wants to see that the HOA has sufficient reserves to cover expensive repairs or replacements.
This isn’t the entire list of requirements, but these are the most common ones we come across. They’re quite demanding – so much so that in 2013, about 60 percent of condo complexes in the U.S. that sought certification were denied, according to John McDermott of National Mortgage News.
It’s Tedious, but the FHA Process has Advantages
No matter what type of home you’re buying the process requires a certain amount of due diligence. The buyer’s legal duty is to inspect the property and associated paperwork thoroughly before going through with the purchase. The onus for due diligence is typically on the buyer, but in the case of an FHA-backed loan for a condo, HUD will do a lot of it for you.
You’ll still need to read and understand every word on every document in the HOA documents given to you before closing. But while you’re trying to understand covenants, conditions, and restrictions, FHA will be poring over the financial solvency of the HOA. This should bring you peace of mind – even though their scrutiny of the HOA’s budget could turn up something distasteful.
Becoming a HUD-certified complex isn’t a one-off task, either. The association must reapply every two years.
Finally, owning a home in a HUD-certified community makes it easier to sell down the line.
If you’re thinking about buying a condo with an FHA-backed loan, do yourself a favor and check out HUD’s list of certified communities – and avoiding those that aren’t on the list. You’ll find the online database here.
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