FHA funding no longer available for condos in communities that aren’t FHA-certified
A little-publicized and often misunderstood change in policies by the Federal Housing Administration is delaying the return of a healthier real estate market in Oregon and Southwest Washington, because it’s making it harder for many owners in local condo communities to sell their homes.
The FHA recently significantly tightened the requirements condominium communities must fulfill to receive FHA certification, and required re-certification every two years. Without certification, FHA financing with its much-sought-after 3.5 percent minimum down payment is not available to buyers. That means sellers must ask for the more typical 20 percent down payment, which often drives potential buyers to listings in FHA-
certified communities.
This is not a small problem. With lenders Fannie Mae and Freddy Mac reeling from massive mortgage losses, the FHA has assumed a greater role in the home lending, and now stands behind as much as 30 percent of new mortgages. Yet even with this growing importance of the FHA, it’s estimated that as of this September, less than ten percent of condominium associations nationwide had successfully completed the certification process. Based on The Management Trust – Northwest’s analysis of the Oregon and Southwest Washington market, only about 43 percent of local condominium associations here are certified.
Advice to buyers who qualify for FHA financing is easy: Unless you’re prepared to pay 20 percent down, tell your Realtor to show you only homes in FHA-certified condo communities. Advice to sellers in uncertified communities is a bit harder to come by, but there are things they can do.
First, sellers shouldn’t assume just because their community isn’t certified that their association board isn’t working on certification. The process is demanding and difficult, and the FHA sometimes rejects applications for minor, highly technical reasons. If your association board is struggling with certification, suggest they seek professional guidance. Many association management companies have experience with FHA certification and some of them, including The Management Trust – Northwest, now provide this service to associations they don’t manage.
Some boards are concerned that the application process will be difficult or costly, and have decided not to try. In these cases, frustrated sellers can make a strong case to their board for reconsidering this stance. The most convincing argument may be that many risk-sensitive lenders have embraced the changes and now require FHA certification as well, and the Veterans Administration’s policies are similar to the FHA’s.
The FHA says the new rules are designed to make loans more secure. It’s true – requiring condominium associations to have no more than 15 percent of their units over 30 days behind on assessments will do just that, as will requiring that at least ten percent of the association’s annual operations and maintenance budget be dedicated for reserves. These, and many of the FHA’s other requirements, are signs of good community management, so residents – sellers and non-sellers alike – should ask their board to actively pursue FHA certification if for no other reason than to become better managed and more financially stable.
Some associations aren’t seeking certification because they feel FHA borrowers are less desirable. This is short-sighted in my view, and could trigger litigation from frustrated sellers, along with a painful downward spiral for property values within a community. Sellers who face this situation should ask their boards to consider what could happen if a financially strapped seller can’t sell because buyers are opting for FHA-certified properties. Would the board rather see a condo be foreclosed on and returned to the lender? When that happens, the lender often prices it under the market, resulting in a selling price that is considerably less than existing comparable values in the community, bringing everyone’s appraised values down with it.
Having helped dozens of associations successfully through FHA certification, I have found one thing to be true: While complying with the new certification requirements is no picnic, the risks of not becoming certified are substantial – and real. Unhappy homeowners, short sales, foreclosures and depressed property values all have negative effects on the quality of life in an community, so the best approach to FHA certification is to focus on the value it brings, not the drudgery and expense of obtaining it.
Kelsie Roper is the Executive Vice President of The Management Trust – Northwest, which manages 265 community associations in Oregon and Southwest Washington. The Management Trust – Northwest is a division of The Management Trust, the largest community association management company headquartered in the Westwww.managementtrust.com/nw.
