Why Is FHA Financing So Popular?
I am excited to announce guest blogger Michael Dunsky from Guaranteed Rate Mortgage who will be covering some of the terrific benefits to FHA financing when you are purchasing a condominium. Michael has been one of my preferred loan officers for years and always does an exceptional job with his clients. Check out Mike’s terrific article on why you may want to consider using FHA financing when buying a condo.
Let’s say that you want to buy a home but are not looking forward to shoveling snow or taking care of the yard. Or, perhaps you are looking to buy in an area where single family homes are too high for your budget. A great alternative is a condominium. Condominiums typically sell for less than single family homes and offer home ownership opportunities without having to worry about general maintenance and upkeep.
There are plenty of home loan options available to those purchasing a condominium but one particular type of home loan, FHA (Federal Housing Administration), offers the least restrictive qualifying criteria. FHA loans are government insured loans designed to help more people qualify and achieve the American Dream of owning their own home.
FHA allows for low to moderate income buyers to buy a property who may not meet conventional loan guidelines or may have been denied for conventional financing. In recent years FHA loans have become very popular given the absence of those more “flexible” loan options that have gone by the wayside in the mortgage meltdown a few years ago. FHA financing basically opens doors to folks who might not otherwise qualify for financing.
Many condominiums buyers are first time buyers and most first time buyers share similar characteristics that FHA appeals to. Usually, first time buyers don’t have a sizable down payment, there is often higher debt for student loans and simply not having much time in the workforce to save much, as well, their credit scores may not be that high due to length of time having active credit. FHA loans seem to have modeled their guidelines to these specific traits.
Qualifying for FHA Financing
• Only 3.5% down payment instead of the traditional 5% down payment required on conventional loans
• 100% of the down payment can be a gift, compared to a conventional mortgage that requires borrowers to verify they have at least 5% of the purchase price from their own funds
• Lower minimum credit score than conventional loans. Most lenders allow for a minimum score of 640 for a FHA loan while conventional loans can require significantly higher scores depending on the amount of down payment. Some lenders will allow for scores lower than 640 under certain circumstances
• More flexible with the amount of debt a person is carrying compared to that of a conventional loan.
The other aspect of buying a condominium with FHA financing is making sure that the condominium project meets FHA’s requirements. This would be one of the questions to ask before buying a condo. There are specific guidelines in place to ensure that the condominium meets FHA’s criteria for a project to ensure it’s long-term viability. In keeping up with the times, FHA recently updated their criteria for certifying a condominium project as there were certain guidelines in place that were outdated for our current economic climate.
For instance, if you are looking at purchasing a condominium unit in a city then it would not be uncommon for the building to have some commercial space (retail stores or possibly professional offices). It was not that long ago that FHA only allowed for 25% of the condominium project to be allocated for commercial space. The revised criteria now allows for exceptions up to 35% commercial space which will free up more projects to become FHA certified and, therefore, open the door for more home buyers.
Another guideline FHA addresses, and has recently amended, is to allow for greater flexibility for one or more investors who can now own up to 50% of the entire project. Previously, this was limited to just 10%.
The owner occupancy ratio should always be looked at when contemplating buying a condominium. The owner occupancy ratio is a simple formula, the number of units lived in by their owners divided by the total number of units in the project. FHA will certify a project as long as the percentage of owners renting their individual units does not exceed 50% of the entire project.
A condominium project is run just like any household or business. There are costs associated with running the project and there are fees that the unit owners pay in order to cover these expenses (commonly referred to as condominium dues or homeowner association fees- HOA fees).
One area that is closely evaluated is the condominium project’s budget. In order to add further protection to a condominium project and to ensure that there are sufficient funds available for general maintenance and upkeep of the building, grounds, and common areas, FHA requires that each condominium project have a line item for reserves in their budget of no less than 10% for additional maintenance and repairs.
One aspect of managing the finances of a condominium project is to ensure that no one runs away with the money. What’s to stop a trustee, the homeowner’s association, or independent management company responsible for all of the condominium project’s finances from mishandling or stealing the money from the budget?
FHA directly addresses this by requiring Fidelity Bond Insurance, also known as “Employee Dishonesty” or a “Crime Policy” is put in place for all condominium projects with 20 units or more. This is yet another protection for the unit owners to help sustain the viability of a project. The last thing you want as a unit owner or potential buyer of a condominium is to find out is that there are insufficient funds in the budget to keep the property looking fresh and clean along with upkeep and general maintenance.
In hard economic times some unit owners may fall behind on their HOA dues/fees and if a significant numbers of owners fall behind paying their HOA dues then this can materially impact the finances and viability of the entire condominium project (not to mention all of the unit owners that may, in fact, have to cover those costs at some point).
Part of FHA’s criteria for certifying a project requires that no more than 15% of all unit owners can be over 60 days delinquent on their condominium dues. This is one area that should be looked at closely prior to any purchase of a condominium. There are many more guidelines that FHA has in place for the sole purpose of good lending practices but these are the most pertinent in today’s lending environment.
Although the process for FHA certification of a project can seem a little excessive, I fully believe that any soon-to-be buyer of a condominium will appreciate that FHA has their best interest at heart.
If you are considering buying a condo and want to work with someone that is very knowledgeable about mortgage financing, has great service skills and competitive rates, I would give Mike a call!
Michael Dunsky can be reached at Guaranteed Rate, Inc which is located at 38 Pond Street, Suite 208 Franklin, MA 02038