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March 17, 2011

Here’s the Latest on FHA Condo Loans

There’s been a lot of discussion among my colleagues and buyer clients about what condos might be available to buyers with FHA loans. So I thought I’d share the highlights, based on my recent conversations with lenders.

FHA loans are relatively straightforward for single-family homes. But for those buyers who can afford a property in the $400,000 range, a single-family home is typically not an option unless these buyers are extremely flexible on location. So many buyers in this price range seek condos, which can be a little more restrictive and challenging to purchase with an FHA loan.

The FHA allows a maximum loan amount to $729,750, with a 3.5% down payment, according to Gil Mora at Bank of America. But many buyers end up borrowing far less than the maximum limit, which lands them in the condo price range.

There are two ways you can go with an FHA loan in this case:

1. Purchase a condo in an FHA-approved building. There are many buildings in San Francisco that are currently in this category. You can see the list by clicking here, selecting California in the state drop-down box, and typing in San Francisco in the city field.  About 25 buildings have resales on a regular basis, such as 199 New Montgomery, Symphony Towers, and certain Diamond Heights Village units. If you are interested in a unit within one of these FHA-approved buildings, things can be relatively smooth. However, some lenders will not grant FHA loans within buildings wherein more than, say, 30% of the units have been purchased by such loans. In Bank of America’s case, their temporary limit is 50%.

However, BofA will grant an exception if certain conditions are met (project is complete and not under construction; 100% of the units have been sold; no entity owns more than ten units in a large project or more than one unit in a smaller building; owner-occupancy ratio is at least 50 percent; control of the homeowners association is in control of the building; the building’s budget provides for the funding of replacement reserves for major expenditures in an account representing at least ten percent of the budget). So if you’re dealing with a building that’s not new construction, it’s likely you’ll be able to get the exception.

2. Write an offer on a condo and request approval for an FHA loan. Obtaining approval for a loan typically takes about two weeks, according to Gil Mora. Some lenders charge a fee for this process (BofA does not). It’s important to understand exactly what the FHA needs in order to approve a condo building. Here’s the current list that Gil shared with me:

HOA certification:  To verify presale, occupancy, completion, special assessments. This is a 12-page document that the property management company or HOA representative needs to fill out. There is sometimes a charge for completion.

Full condo name:  Condo ID and Association TAX ID number

Condominium declaration (recorded):  “AKA” Master Deed “AKA” CC&R’s.  Must be submitted as electronic PDF required

By-laws:  Executed copy required

Articles of incorporation:  Filed and endorsed copy required

Budget:  Proposed or Current Fiscal Year required with an itemized line reflecting 10% reserve allocation and all HOA financials

Reserve analysis:  Less than 12 months old.  Note:  Only required if budget does not reflect an itemized line for 10% allocation on the budget

Executed management agreement or Self Management Statement on the association letterhead

Evidence of insurance:  Hazard, Liability and Fidelity bond (AKA crime or employee dishonesty, 20 units or over need Fidelity Bond)

Condominium plat map:  That shows the exact location of the building and utilities on-site.  Map must include lot, block and plat number.  Recorded copy required.  Reduced 8.5 x 14 copies also required.

Condominium plan:  Recorded copy required (may be one in the same as Plat but if not, both are required)  Reduced 8.5 x 14 copy required.

FEMA flood map:  We will order at branch level

Litigation, if applicable:  Copy of Litigation and Attorney Summary.

As you can see, there’s quite a package of documentation required for FHA approval. It’s really critical that your real estate agent, listing agent, title company and lender are able to communicate frequently and easily in order to pull together everything necessary. FHA approval of the building will be, of course, tied to your financing contingency. So the faster your group is able to assemble the package and submit it to the FHA, the faster you’ll obtain approval and have your financing cleared.

It’s also key to understand that some of the aforementioned conditions and documents may not exist for smaller, more casually run buildings. For example, many two- to -four unit buildings don’t have much in reserves (and don’t have 10% of the budget in a reserve account), nor will they necessarily have a thorough budget or reserve study on hand. So if that’s the case, you may move on to a unit in a building that will be able to satisfy the FHA requirements.

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