CONDO ALERT - Yes, condos have looked attractive to many borrowers of lately because they are dropping in price in several areas by more than a few dollars. But so many people are asking why Condos are more difficult to purchase now than ever before. And so many are complaining that lenders are being more difficult when purchasing condos. The main reason? Many condo associations are under water when it comes to the monthly dues that they collect. They are in the red... I know of one association that is over $50,000 in the red. By normal standards, the association is suppose to have 2 months or more in reserves per unit. Hence why it's been harder to get buyers a mortgage when there are no funds in the reserve account.
In any case, HUD just added a new mortgagee letter on June 12th, 2009... ML 2009-19. Condominium Approval Process
So, what does this all mean? The mortgagee letter, ML 2009-19, goes into effect on FHA loans with any FHA case number assigned on or after October 1, 2009. What is the biggest issue with this new mortgagee letter? The Spot Approval process as defined in Mortgage Letter 1996-41 is eliminated with issuance of this guidance. The DELRAP and HRAP processes have been streamlined to allow for uncomplicated condominium project approvals eliminating the need to approve units on a “spot loan” basis.
Overall, in laymens terms? Lenders won't be able to do 'spot approvals' of a condo unit. What they will still be able to do though is to approve a whole condo project. The mortgagee letter goes into more detail stating that only those lenders that have experience in condo project approvals should do this. In regards to Infinity Home Mortgage Company, we have a few underwriters with 15 + years of doing condo project approvals. And we will take this challenge and still approve condo projects. But HUD says that it can only be done 2 ways. Per the mortgagee letter, this is stated :
The Lender will have 2 options:
- HUD Review and Approval Process (HRAP).
- Direct Endorsement Lender Review and Approval Process (DELRAP), outlined in this Mortgagee Letter. This option is only available to lenders who have unconditional Direct Endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects.
What type of projects are allowed under this new process?
- Proposed/Under Construction;
- Existing Construction; or
- Conversions.
Conclusion : As mentioned, HUD states that only those lenders that have experience in the past should be doing these condo project approvals. Yes, they have streamlined the process to make it simpler. But taking away the spot approvals will add more time onto these approvals. I didn't want to bore anyone with the details of what is allowed, what is not allowed, and what the process is for these approvals. But it can be read in this mortgagee letter, ML 2009-19. Overall, FHA loans are very affordable and this news about spot approvals should not discourage any borrower.... but... be very careful about the association dues, because I have seen many more in recent months become more expensive, just because the lack of funds in the reserve accounts, which is needed for approval. And HUD will always be updated the Condo approval list. You can find out if your condo association is approved by clicking on this link. HUD condo approved list
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Copyright © 2009 by Jeff Belonger of Infinity Home Mortgage Company, Inc
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Follow me on:
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For more information on FHA loans, please go to this link. The FHA Expert
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!
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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc
Great post. I am going to bookmark this one for future reference
Jeff, it's amazing how many condo projects here in DC are not FHA approved. It would be great to see a post on the hoops an established condo project must jump through to get approved.
Jeff, thanks for the condo update. I appreciate your updates. ~jen
Jeff, great information. It just all makes my head swim. Good thing there are people like you who actually know what is going on. I am also bookmarking this.
Great post, as always!
Thanks for another terrific posts. You provide such helpful and important information. This is timely for me as I have a client who is going to start looking at condos in a couple of weeks.
Jeff, you didn't go into what is required so i will go read the letter.
But, we had a lot of condo's not approved here in Ann Arbor, so I hope this helps. The buyer or seller was having to pay for the Spot Approval as the Association charged for their tiime to do a spot approval. Now I have no clue why they didn't do it one time and keep it on file. It brought the condo's prices way down.
Some units could not be sold FHA, is this still the case? Some folks had to pay cash or go conventional just to get in.
If it was only finished in one phase it would not make the cut. So are you saying those can now be approved ?
STEPHANIE.... . thanks for the compliment.
PAT... . there are many projects that aren't FHA approved nor approved for conventional loans. And there is a main reason why... or maybe 2.. lol but condos are becoming a major liability because of the reserves. If they don't meet this requirement, it's dead in the water. As far as what hoops need to be jumped through... I didn't mention it in this blog, because it would have been very long and boring. It's mentioned in the mortgagee letter. thanks
JEN.... . my pleasure and thanks for stopping by.
ANDREA... . I think this mortgagee letter made many heads swim. Especially those lenders that never really did a spot approval. Because it will be tougher than before and more tedious.
VICKI.... . the first thing your clients need to do is speak to a lender and find out if the condo association is FHA approved or FNMA approved. ... depending on what type of mortgage they would be applying for. Each investor even has a list of condos that are approved or not. And thanks for those polite compliments... much appreciative.
MISSY.... . I didn't get into what is required because it's long and boring. Besides, that is for the lender and most realtors won't understand it anyhow. And as mentioned, those lenders that never did spot approvals, won't end up going this route either.
The part that you said the buyer or seller was having to pay for the spot approval? I am not sure I understand that one. We never charged anyone for a spot approval. The only thing the buyer had to pay for was for the condo questionnaire. Many associations wanted $25 to $50 upfront to complete the form.
In regards to your other questions... a project can be under construction. And there has to be certain ratios of units sold, units owned by primary owners, etc, etc. All of this is mentioned in the mortgagee letter also. And those units, now the projects, that aren't or weren't FHA approved... if they don't meet the requirements, yes, you must get conventional financing or pay cash. But keep in mind, many of these same projects aren't even approved for conventional loans. You can still do limited reviews on them, but it depends on the loan findings went sent through the automated systems.
Jeff: Thanks for the update. My experience with spot approvals is they're seldom a slam dunk anyway. Just one "no" and the deal is usually killed. I had a borrower recently who wanted to refinance her condo. but her association was embroiled in a lawsuit. Another deal killer. Fortunately a banker friend of mine was able to get her a line of credit so she could afford the extensive remodeling project the development faced. I believe the condo. market will improve although it may be into next year before that happens. Have a great day!
Jeff, I will be following this post. The fact that the "Right of First Refusal" is not a factor by itself to disqualify a Condo from FHA Financing. The thing that will be important are the guidelines that FHA will want to see regarding the condo budget and reserves. Hopefully they mimic Fannie and Freddie requirements.
Good info Jeff. I'm in Orange County, CA and we have a lot of condo projects which have never been approved because of the previously low FHA loan limits and the availability of other high ltv financing options. Hopefully the new approval process will result in many more approved projects.
What if the condo is not on the link you sent over?