There are all kinds of acronyms floating around when talking about mortgage programs for condominium associations: FHA, VA, FMNA, FHLMC, FDMC, etc. Community associations may benefit from learning about these programs, especially FHA.
What is FHA?
The Federal Housing Administration (FHA) is a part of the Federal Department of Housing and Urban Development (HUD). One of the goals of the FHA is to promote affordable housing for all. FHA is not a lender. Rather, it guarantees mortgages on homes. Lenders who give mortgages to purchase units are protected if the mortgages go bad. A community association may become “FHA approved,” which means the community is placed on a list of approved communities.
What are the benefits of being FHA approved?
To put it very simply, being FHA approved may greatly increase the number of potential purchasers in a community. Why is this? Because lenders will approve loans that are insured by FHA that they might normally reject. A buyer can qualify for an FHA insured loan with as little as 3.5% of the purchase price as a down payment, and a credit score as low as 580. The maximum amount of an FHA loan varies from county to county but, in Lancaster County, FHA will insure a mortgage up to $271,000. For home purchases, about 25% of buyers utilize FHA loans. FHA also insures mortgage refinances and a reverse mortgage program for homeowners 62 years old or older. These programs may help people who are already members of the community.
What are the disadvantages of being FHA approved?
In order to be approved by FHA, the community association must meet the FHA guidelines. Sometimes these could be difficult or impossible to achieve. These guidelines include:
- at least 51% of the units must be owner occupied
- there cannot be any pending legal actions against the association
- the budget must be sound – this means that capital reserves must be at least 10% of the operating budget, among other considerations
- cannot have more than 15% of units (including bank-owned units) past due for assessments for more than 30 days
- the association may be required to carry flood insurance
- there may need to be bonds covering officers, directors, employees and anyone else who may handle the association’s funds
- the association may have leasing restrictions, but the association cannot have the right to approve or deny prospective leases
These are only some of the legal guidelines that a community association must meet to become FHA approved. Some communities may not want to, or be able to, meet these requirements. Each community should take time to weigh the benefits and drawbacks of FHA certification.