OT- MGOFinance: FHA Certification for my condo association- pros and cons?
My condo association here in Chicago is voting on if we should become FHA certified or not. I know there are quite a few smart fiancial minds on this board and any help anyone can provide as to pros and/or cons of FHA certification would be greatly appreciated.
FHA certification doesn't really mean anything to the people already residing in the condominium complex. It will only matter to people looking for FHA loans to purchase condos in the complex. Lenders will not lend to propsective buyers using collateral not approved by HUD. HUD looks at occupancy rates, any commercial use of the complex, % of ownership of units, etc. As far as I am aware, it won't affect the association outside of a broader base of potential buyers.
I understand that it will make my unit easier to move, but I was curious if there were any glaring negatives that I am missing as an owner who does not intend to move for a while.
If the condo is not FHA certified you will limit the pool of potential buyers if you were to ever sell. If you want your investment to retain its value and hopefully increase in value it needs to be exposed to as many potential buyers as possible.
Since 2008 FHA is the primary source of mortages that are not 20% down.
I bought a condo about 15 months ago with an FHA loan. I was fresh out of college, and didn't have a ton of money to put down, but I was making a solid annual salary. The FHA loan allowed me to put ~5% down. I pay a small monthly fee to the FHA, and in exchange, they insure my mortgage to my bank.
What FHA certification will do is that it will allow more people to buy units in your building. It might create a bit of a sellers market, as more buyers will be able to compete for the same properties. It's good for buyers in that it expands the market for subprime buyers.
PROS:
More buyers = potentially higher prices/actually being able to sell
CONS:
Could remove the "elite" nature of a building. The closest analogy I can think of is if an exclusive country club removed a barrier to entry. More people will be able to join, reducing the exclusivity factor.
Personally, I would vote yes. Unless the average price on units in the building is more than 750k, voting yes is probably the +EV way to go.
An FHA certified condo has to meet financial requirements. Many developments in the sub prime era would be selling units and only having to pay off 70% of the purchase price based on their commerical financing. FHA would not certify developments with high debt loads to protect their debtor position.
Of course several upside down developments sold units that were financed by trash packaged at A rated loan pools when in truth it was junk commercial paper behind junk residential paper.
IOW's feel good you can be certified after coming through the last 4 years.
Pro: Makes it easier to move units
Con: The requirement that you implant that government tracking microchip in the base of your skull.
/tin foil hat
and the biggest one is that it potentially limits your ability to rent out your unit in the future. You can only rent out a set % of the units in an FHA approved building so most Condo Associations will but language into your rules that states "you will not rent your unit without prior approval from the board blah blah" so they can keep count of the rentals and ensure compliance with FHA standards.
If you want to rent your unit but the building is maxed out....tough luck, no rental potential for you.
This cannot be enforced after a condo is purchased as an owner occupied unit. FHA also has in their loan language that the owner must reside for a year. Even is the owner moves that cannot stop the owner from renting.
This has never been upheld because if flies in the face of equal protectiion in the rights of property.
If more than 50% of the units are rental units or not OO then FHA wouldn't certify the condo anyway.
As I understand, however, the FHA must reapprove the building every 2 years. The building could go past the % of rental, but would then have to drop back down below the required amount in time to be reviewed every two years.
it does get reviewed. I rented in a building that lost FHA status due to the high percentage of renters.
As a new father I don't want to limit my options. So does having FHA certification have ANY potential to limit my ability to get out if need be? Meaning if a bunch of other people have already rented their units (we have 13 in our building) and I needed to rent mine in a dire circumstance could I?
There is currently NO verbiage in our by-laws limiting the percentage of units that can be rented. (Mistake to start with, I know...)
Having an FHA certification will likely increase the pool of potential buyers should you look to sell your condo. I am in risk assessment for a large mortgage lender that deals with FHA products and I have never heard of any FHA rules dealing with % of the condo units rented as this will be unknown to prospective lenders without appraisals done on each condo unit. % of units occupied is another thing. FHA certification is a good thing if you are a condo owner looking to sell. Bad if you're a taxpayer though.
Condo Declaration 22.1
The condo association president and/or management verifies how many units are being rented as part of the FHA loan approval process.
Most associations, if they are smart, require notification of the association if the unit is rented out and some have fees assocaiated with this. Even if they don't, most have move-in or move-out fees, and the management company or association would know if someone had moved.
There is indeed a maximum percentage of units rented requirement. I believe it is 50%. As a risk assessment manager I would hope you know that second home used for rental income or owned by investors and rented out are much riskier investments as owners will walk away from those units or fire-sell them before their own residence.
Also - northside blue - owners that buy with an FHA loan are much riskier and may have trouble selling when they need/want to. This may increase the risk of short-sales and/or foreclosures in your builing and crush the value of your place much more substantially than having it not FHA approved.
5% down non-FHA mortgages are back.
Moral of the story - VOTE NO
I said I had never heard of any rental % as a requirement for certification. I wasn't saying you were wrong. I said I wasn't aware of any. We were speaking generally and not about one particular buyers layered risk profile but thanks for the tutorial. I don't work in compliance and I don't assess condominium associations for FHA certification. The OP asked a question in an internet forum and I gave my opinion.
I don't have any data but just a thought, is there any difference in the default or forclosure rates on FHA loans vs Conventional?
My gut feeling would be that someone who can only put 3.5% down would be a riskier investment than someone who puts 20% down.
If that were true, you might be limiting who can buy your condo by not being FHA certified but you'd be helping to mitigate the risk of a buyer defaulting or forclosing which could cripple your property value.
If FHA loans don't default at a higher rate than Conventional loans, my entire post is worthless.
I appreciate everyone's input! I obviously like the larger pool of buyers, but having bad owners that could default or owners renting too much that will limit my ability to get out should an emergency occur makes me fearful.
Tough decision...