Condominiums are a challenge to finance through FHA. Condominiums had a brief period when lenders overlooked eligibility and approved every loan, as long as the borrower was qualified – that period ended some four years ago.
Today, condominiums are one of the most difficult forms of residential real estate to finance, perhaps with manufactured housing more difficult. Using a search of “Charlottesville” condominiums in the FHA search tool, 19 condominium complexes appear. Hey, good news, right? Not so quick. Eight of those complexes have expired and four more will expire in the next three weeks. So, the list of available condominiums is shrinking and lenders are not taking advantage of the DELRAP process to approve condominiums – only one of the approved list was certified by a lender.
What makes a project approvable? In addition to the expected – insurance, acceptable budgets, contingencies – commercial space can not exceed 25%. The City of Charlottesville is big on pushing mixed use residential. Realize that this makes a condo MORE difficult to finance. At least 50% of the units must be owner-occupied and 10% of the units can not be controlled by one company or individual. No more than 15% of all of the units can be delinquent on their condominium association fees. Other requirements exist as well, but those are the biggies.
This pool of eligible condo complexes is shrinking. What is a buyer to do? There is very little that an FHA buyer can do, other than check with his or her loan officer to make sure that the unit that they are seeking to purchase qualifies. Townhouses do not fall in this category, so that’s an alternative. If a buyer has access to a larger down payment, conventional lending opens up possibilities of non-approved complexes, assuming that the complex generally has 70% or greater owner-occupancy.
What’s a seller to do? I’ve had this discussion with a condominium owner on the condo board of his complex. The most important piece of advice to him was to make sure the complex paid attention to their rules regarding percentage of owner-occupied, in order to maintain their approvable nature. Do not let one unit owner break the rules and thus, put everyone at jeopardy of future sales and more importantly, the value of those units.
A word of warning – even if the complex appears on the approved FHA list, it may still be denied, because a change of any number of items, but most specifically the 50% owner-occupancy. That condo list is only a guide, not gospel.
Now for my two cents:
FHA buyers and financing make up a significant portion of the buyers in the Charlottesville area. I don’t know how to find out exactly what percentage (I’ve called FHA and HUD in the past and they’ve been quite unhelpful).
First – there are some condo developments in the Charlottesville are that deed-restricted with respect to renter-occupied units, meaning that some units are non rentable. This cuts both ways; on one hand, this is good because it limits the percentage of tenant-occupied units. On the other hand, it limits the buying pool as a lot of people either want to buy a unit as an investment or want the option to rent.
Second – More than ever, doing due diligence is crucial in the buying and selling process. Really and truly, hiring professional help is a good idea.
For condo buyers:
1 – Work with a good lender who knows to check a condo’s FHA eligibility. You’d be surprised how many don’t.
2 – Be aware of this early on.
3 – Be aware that condos come with risks that are outside your control – percentage of owner-occupancy, budget, other owners’ paying their bills …
4 – Work with a good Realtor who knows what questions to ask and to whom to direct them. (I am one of these, you know)
5 – Be aware of the questions Matt raised and more – as they will affect your resale value.
For condo Owners/Sellers:
1 – Make sure your condo has FHA eligibility.
2 – If it doesn’t do what it takes to get it.
3 – Be aware that if your condo doesn’t have FHA eligibility, you’re likely to have fewer qualified buyers to market to. Fewer buyers typically means less marketability which typically means lower values.
4 – Seek professional guidance and advice early on in the process. I’m working with quite a few potential sellers now who are planning to put their houses on the market in the spring.
* Disclosure: I have recommended Matt to my clients for nearly 10 years and have found him to be one of the most competent and knowledgable lenders in Charlottesville.