There has been a great deal of debate about how to successfully afford housing for the younger generations in the United States that have larger financial strains due to excessive debt or limited credit history. The federal government has made an effort to create a policy that enables less-established prospective buyers to have the potential to successfully obtain equity in a property of their own. The Federal Housing Administration has created avenues where more accessible mortgages can be obtained for qualifying residential communities that have obtained FHA approval.
One of the more complicated processes is receiving FHA condo approval due to the strict requirements involved in the approval process. Many communities attempt to decide whether obtaining Federal Housing Administration approval is the right choice for their particular community to increase their overall occupancy of dues-paying residents. There are several benefits to community associations that decide to obtain FHA approval. That said, there are many pitfalls during the process that HOAs should attempt to avoid. If your community is considering FHA approval, then it is recommended to review the information below:
What Is FHA Approval?
The FHA creates several incentive programs located nationwide to make housing more accessible to individuals that may not necessarily have sufficient capital to pay a normal 20% down payment on any property that they are purchasing. Federal Housing Administration properties have received a particular focus in recent years due to the multitude of graduates with student loans that are having difficulty both affording and qualifying for traditional mortgages.
FHA loans are available to individuals that are only able to make a 3.5% down payment on a property that they are attempting to purchase so long as they have a credit score of 580 or higher. While these loans do require a mortgage insurance fee included in the mortgage’s calculation, they do present an easier path to homeownership that was previously not accessible to individuals lacking the capital to afford a larger down payment. While FHA loans are very appealing, they have an important catch, which is that only certain buildings or communities can use them.
Also, FHA loans have mortgage loan limits for the total amount that can be taken out depending on where in the United States the community is located. Currently, there are limited options of FHA approved communities for prospective FHA loan clients to choose from. For communities that are looking to increase their occupancy while providing more ownership opportunities to first time buyers or individuals looking for a lower down payment, obtaining FHA approval is a wise decision.
Is it Difficult to Obtain FHA Approval?
Obtaining FHA approval can be quite complex. When the FHA is reviewing a condominium association’s application for certification, several criteria can cause a community to be immediately rejected. One common association with rejection is the ratio of owners to renter’s owner-occupancy ratios. One of the most important qualifications for a community to be FHA approved is to have owners that intend to reside in the property purchased with FHA financing as their primary residence. For communities that have many investors renting to tenants, achieving the required ratio can prove difficult, which is why many communities are not successful in obtaining their FHA approval.
What Are the Precise FHA Requirements on Condominium Owner Occupancy?
One of the FHA’s primary objectives is to back all of the mortgages that it issues. This is precisely why they want to evaluate data to assess the risk of the mortgage they are issuing. The area related to the ratio of owner-occupants to renters is one of the key sets of data that they analyze. One of the key requirements for obtaining FHA approval, an existing condominium association must have at least 50% of the units owner-occupied or sell to owners that are intending to occupy the unit.
There are exceptions to this 50% standard to as low as 35% that are decided on a case-by-case basis. If the owner-occupancy is less than 50%, but not lower than 35%, the association still has the possibility of obtaining FHA approval; however, FHA will require additional documentation to approve the community’s application.
The additional required documentation has the potential to consist of proof that:
- Reserves are funded at an annual amount that is equal to 20% of the budget.
- No more than 10% of the units can be 60 days late in their assessment.
- The association has at least three years of acceptable financial documents.
What is important to remember is that owner-occupancy ratios that are below 50% are not impossible to deal with; however, they do present additional bureaucratic approvals to obtain FHA approval.
Are There Any Potential Exceptions to the Owner-Occupancy Standard?
Traditionally, FHA loans are only given to individuals that want to occupy the property. While this is still the standard, some states prove exceptions for parents co-borrowing with their child or close family member on a mortgage. While these mortgages can be more complex, they do allow the possibility of a child still meeting the owner-occupancy standard if their parent with more established credit is guaranteeing their mortgages. What is important to realize about this exception is that it is aimed at the objective of more individuals to successfully be on the path to homeownership in spite of excessive student loan debt, little employment history, or little established credit.
How Long Does it Take to Get FHA Approval?
Once an application of FHA approval is completed, it can take up to thirty days to be approved. Your HOA needs to be proactive in attempting to obtain FHA approval because if you have buyers that are attempting to use FHA financing for their sale and they have to wait at least thirty days, this could result in them choosing another community that already has their FHA filing in place. It is better to be proactive with your FHA application to avoid unnecessary delays or lost sales.
What Are the Benefits of Obtaining FHA Approval?
Even though the process to obtain FHA approval is tedious, the approval does last for at least two years. What your HOAs objective should be is to attempt to fill as many of your units as possible. This is important because your HOA will have more fees that can be utilized to run the HOA and benefit the community effectively. If buyers have too many financial hurdles to be accepted into your community, it can limit the fiscal resources that you have available to you.
FHA approvals last for two years, which is why they are worthwhile to increase sales for at least two years. HOAs that elect to continue to file for FHA approval will see an increase in occupancy along with increased compliance of community regulations since owners have a more vested interest in complying with community norms than renters to maintain a positive relationship with the HOA for a longer duration of time.
How Clark Simson Miller Can Help
Clark Simson Miller is a professional organization that provides remote management, financial services, accounting, and support to community associations and managing partners of all sizes within the United States. Our direct association services enable HOAs to provide better services to their residents. To receive more information or a free quote regarding Clark Simson Miller’s offerings in California, contact us online or give us a call by dialing (865) 315-7505.