For condominium association boards looking for ways to enhance property values and market their community to potential new buyers, having the condominium association approved for FHA-backed loans is potentially one of the most effective ways a board can go about this. In order for a buyer using an FHA-backed loan to purchase a unit within a condominium, the condominium association first needs to be approved by HUD. HUD’s initial approval is good for a two (2) year period, and must be renewed every two (2) years or else it will expire. With required down payments as low as 3.5%, some estimates show that more than half of all first-time home purchasers use FHA-backed loans. Thus, condominium associations that are not FHA approved are potentially losing out on a significant pool of potential home buyers.
Initially, to clarify some common misconceptions regarding FHA-backed loans, these are not related to Section 8 or any type of low-income government subsidized housing program. Rather, an FHA-backed loan is a loan given by a private lender that is insured by the federal government. In some cases, FHA-backed loans can be used to purchase condominium units with a purchase price of over $400,000, and therefore these loans could potentially be used to purchase a high percentage of the condominium units available within the Chicagoland area.
From a marketing standpoint, there are a number of potential benefits for a condominium association that come with being approved for FHA-backed loans. FHA approval for condominium associations is only granted for a two (2) year period and must be renewed after that. In determining whether or not to grant FHA approval to an association, HUD reviews certain association financial documents, delinquency information, owner occupancy rates, reserve contributions, and insurance information (among other items), and determines whether or not the association meets HUD’s minimum requirements for each of these items. Associations that desire to remain FHA approved must go through this process every two (2) years. Thus, receiving FHA approval can allow an association to market itself as having gone through HUD’s review process and having met HUD’s requirements. This can also allow the association to potentially distinguish itself from neighboring associations that either have not gone through this process or have been deemed by HUD to not meet all of HUD’s requirements for FHA approval.
Another potential marketing benefit of being FHA approved is that this could allow an association to attract more buyers desiring to live within the community as opposed to investor owners. FHA-backed loans are designed for home buyers who are looking to purchase the home as their primary residence. In most cases, FHA-backed loans are not available for buyers desiring to purchase the home as an investment property. Thus, being FHA approved may open an association up to a potential pool of buyers that are for the most part looking to buy a home to live in instead of rent out.
Furthermore, having an association approved for FHA-backed loans is a requirement for an owner within the association to obtain a FHA reverse mortgage (HECM). Reverse mortgages have become a popular financial tool for some retirement-age home owners. Therefore, whether or not an association is FHA approved could be a major factor for prospective buyers considering this reverse mortgage option in the future.
There are potentially other benefits to a condominium association being FHA approved as well, which is why many condominium association boards explore this option for their associations. If your condominium association is considering applying for FHA approval or renewal of a current FHA approval and would like assistance with this process, please feel free to contact our office and one of our attorneys would be happy to assist you.
This article is being provided for informational purposes only. This article does not constitute legal advice on the part of Keay & Costello, P.C. or any of its attorneys. No association, board member or any other individual or entity should rely on this article as a basis for any action or actions. If you would like legal advice regarding any of the topics discussed in this article and/or recommended procedures for your association going forward, please contact our office.