Condominiums are getting more and more difficult to finance, and recent FHA Underwriting guidelines changes for FHA Home Loans in North Carolina are not helping! The lure of living in a Condominium in an Urban part of North Carolina is obvious, especially for Environmental Conscientious Millennials who love to live in a “walkable” area. Many of the Condominiums Projects in North Carolina are located down town, or in a newly built area like North Hills in Raleigh, NC.
Owning a Condo can be perfect for a First Time Home Buyer, because all of the maintenance for the building is covered by the Home Owner Association (HOA). The HOA dues are charged monthly, and are included when qualifying you for a mortgage loan. The dues can vary wildly from one project to another because some projects include “posh” amenities like Concierge Service, while others only cover maintaining the parking lot, and replacing the roof when it needs it.
FHA doesn’t actually make the loans on Condos in North Carolina, however they write the FHA PMI that covers the Bank in case you have a problem and can’t make your payments. The problem is that FHA has had SO MANY requirements to buy back mortgages, they are in a position of being on the brink of Insolvency. One of the biggest problems they’ve run into is Home Owner Associations where 30 percent of the building went into foreclosure – and the HOA itself became insolvent. In those situations, FHA had to not only cover the Units they had insurance on – they had to take over the HOA as well!
Because of this “negative” pressure on the FHA System across the country, the FHA Condo Approval process in North Carolina is about to understandably get much tougher.
According to Mortgagee Letter 2009-19, the following changes are being put in place for Condominium Projects:
- FHA will NOW allow lenders to determine project eligibility, review project documentation, and certify to compliance of Section 203(b) of the NHA and 24 CFR 203 of HUD’s regulations. The Lender must keep all legal documents on file.
- Project Approval is not required for FHA‑to‑FHA streamline refinance transactions; or FHA/HUD Real Estate Owned (REO) Division sales.
Okay- so if the FHA Condo Approval is not dependent on a FHA Department approving the Project… why did you say the process is going to get tougher? Couple of reasons – one, the list of items below is pretty daunting – but also because, most Bank Underwriters have no experience approving an entire Condo Project. In the past, you could look at a “spot” one Unit approval – and you didn’t have to look at the ENTIRE Project to see if it met all of FHA’s requirements. Putting that pressure on a Bank Underwriter means that in many smaller Companies, these loans simply will not be done.
The following requirements apply to all North Carolina FHA Condominium Project approvals:
Projects consist of two living / housing units or more.
Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.
Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation in 24 CFR 100.
No more than 25 percent of the property’s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogenous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
No more than 10 percent of the units may be owned by one investor. This will apply to developers/builders that subsequently rent vacant and unsold units. For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete; and only one unit can be conveyed to non-owner occupants.
No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
At least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. Valid pre-sales include an executed sales agreement and evidence that a lender is willing to make the loan.
At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of pre-sold units (the minimum pre-sales requirement of 50 percent still applies).
If the owner-occupancy ratio includes pre-sales, FHA requires an executed sales agreement and corresponding evidence that a lender is willing to make the loan and the buyer intends to occupy the unit. A separate owner-occupancy certification is also required in the FHA case binder for loans where the Individual Condominium Unit Appraisal Report, Fannie Mae Form 1073, does not contain the required data or the condominium project is proposed or under construction.
On multi-phased projects the owner-occupancy percentage is calculated on the first declared phase and cumulatively on subsequent phases if the ownership of the condominium project remains the same;
If multi-phasing includes separate ownership per phase, each phase is calculated individually; or
Single-phase condominium project approval requests must meet the owner-occupancy percentage requirement.
WHAT DOES ALL OF THIS MEAN? Well, from our perspective it means that the process of buying a Condominium in North Carolina and using the FHA Home Loan Program for that purchase more complicated (and more costly). The update in the FHA Home Loan Condominium Approvals in North Carolina, also make purchasing a unit in a NC College town, near one of the Universities (with a FHA Non-Owner Occupied Co-Borrower loan) almost impossible. If you are considering the purchase of a Condominium in NC and want to use FHA financing, CALL US – Steve and Eleanor Thorne, Connect With Us on Facebook, 919-649-5058.