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Condo And Loft Financing Requirements For Buyers
Much of my time is spent working in the Downtown Albuquerque area, East Downtown, and Nob Hill, and as such, many showings I gravitate into are lofts and condos. I love touring them, and imagine myself in one of them in the near future.
One of the common misconceptions about condos and lofts is that the loan process is the same, when in fact, many are very difficult to secure financing for. FHA loans have stringent guidelines that many condos and lofts don't meet, due to Homeowner Associations (HOA's).
If you're working with the right people, you'll know well in advance whether or not you'll be able to purchase a specific loft or condo through FHA. The tricky part is that each HOA has to register with Housing and Urban Development to be approved. If it's not approved, it's not eligible for this route of financing.
When this happens, you can still purchase a place with a conventional loan with as little as 5% of a down payment, but very few mortgage providers offer this. Now, let’s take a look at what FHA requires of condo and loft buyers that differs from its single-family home requirements.
Now, get ready for a ton of dry info that should help, if you're the type that likes an overabundance of info.
The basic FHA requirements
Lenders have a tough job, especially when it comes to buyers using an FHA-backed loan to purchase a condo or loft. Not only must it determine if the borrower is a decent credit risk, but it must also take into account the risk of loaning money for a home that is governed by a homeowner association. And, regardless of your credit worthiness, if the HOA has problems, the lender and/or FHA will deny the loan.
Some HOA problems that FHA frowns upon include:
A high number of rentals in the community. FHA rules demand that, at minimum, 50 percent of units must be occupied by the homeowner. In 2016, HUD changed the minimum to 35 percent, under certain circumstances. Learn more about those circumstances at HousingWire.
The homeowner association fee delinquency rate must be lower than 15 percent of the budget.
No investor/entity may own more than 50 percent of the units in the community, but only if half of the units in the community are owner occupied. So, if Warren Buffet or some random Saudi Prince decides to snatch up 52 percent of the homes in the Albuquerque High Lofts community, hypothetically, they will be denied HUD approval.
FHA will not guarantee loan repayment on a condo or loft community that is in litigation. Once the litigation is settled (which can take years), the community can be considered for certification. Litigation examples run the gamut from the HOA suing the developer for construction defects to the famous cases of homeowners suing the HOA for the right to fly an American flag and the proper disposal of pet waste.
The HOA’s cash reserves must be equal to or in excess of one-years’ worth of the association fees. FHA wants to see that the HOA has sufficient reserves to cover expensive repairs or replacements.
This is by no means the entire list of requirements, but represents some of those we most frequently come across. They are quite demanding – so much so that in 2013, about 60 percent of U.S. condo and loft complexes seeking certification were denied, according to John McDermott of National Mortgage News.
Sure, it’s tedious, but the FHA process has advantages
Any Albuquerque home purchase requires a certain amount of due diligence. The buyer’s legal duty is to thoroughly inspect the property and the paperwork that goes with it, before going through with the purchase. Typically, the onus for this due diligence is on the buyer, but in the case of an FHA-backed loan for a condo / loft, HUD does a lot of it for you.
Yes, you still need to read and understand every word on every document included in the HOA documents provided to you before you close on the home. While you’re trying to wrap your brain around covenants, conditions and restrictions, however, FHA will be pouring over the financial solvency of the HOA. While they may just find something distasteful in these documents (sometimes, there are still discriminatory restrictions in writing even though they’re not abided by in Albuquerque) knowing that they’re scrutinizing the HOA’s budget and other financials should bring you peace of mind.
Becoming HUD-certified isn’t a one-off task, either. The association must reapply every two years.
Finally, owning a home in a HUD-certified community in Albuquerque makes it easier to sell down the line.
If you’re toying with the idea of buying a condo or loft in Albuquerque with that FHA-backed loan, do yourself a favor and check out HUD’s list of certified communities. Then, avoid looking at those that aren’t on the list. You’ll find the online database here.
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