Winning FHA Approval Financing Through Fannie Mae & Freddie Mac

 All for one and one for all. We always knew that buying a unit in a condominium project meant that the value  of our property depended in good part on the likeminded conscientiousness of  our neighbors. Where owners live, vote and fund the maintenance and improvement of the  communities, homes and their values thrive. And it has been long understood  that the more buyers who can bid for homes in the community, the more likely  the value of the homes will be enhanced. But the interdependency between  homeowners became a more serious relationship in 2010. No longer can we individually secure an FHA-backed loan to purchase or refinance  a unit in a condominium. Those loans are now extinct, with one exception: where  the condominium project as a whole receives the nod from FHA, FHA will allow  lenders to make loans to individual homeowners living in the community. So how  do we get the Federal Housing Authority to smile upon our particular  condominium community? By proving that most residents live there, pay their  fees, save money and can manage to stay away from being sued. If the overall  condominium project wins FHA approval, some of us will get our loans.  

 The Lending Quagmire?

 So what does this lending quagmire mean in the condominium context? The two  800-pound gorillas in this setting are the Federal National Mortgage  Association (“Fannie Mae”) and the Federal Housing Administration (“FHA”). While they each have a major impact on financing home purchases, they go about  their tasks quite differently. Fannie Mae purchases loans made by traditional  mortgage lenders, thereby putting more money back into the marketplace and  allowing lenders to lend that money for new loans. In many instances, Fannie  Mae ends up owning the loan. Even when lenders don’t sell directly to Fannie Mae, however, they generally seek to ensure that their  loans are saleable to Fannie Mae to maximize the marketability of their loan  portfolios. Of course, Fannie Mae imposes minimum standards on the loans that  it purchases to decrease the likelihood that it will ever have to foreclose  and, if it does have to foreclose, that it will recover the amount it paid for  the loan. Obviously, prior Fannie Mae standards did not sufficiently protect it  on this front, which is why we have seen significant changes in its guidelines  over the preceding year.  

 FHA, on the other hand, does not purchase loans. Instead, it insures loans made  by traditional lenders. This allows lenders to make loans that would typically  be considered more risky, because the buyer puts down less than 20 percent of  the purchase price. If the loan meets FHA guidelines then FHA will then insure  the loan so that if the lender should ever need to foreclose and does not  realize the amount lent, FHA will make up the difference. This insurance comes,  of course, at a price, which is paid by the buyer; typically 1.5% of the loan  amount upon closing and one-half of one percent of the loan amount per year, at  least until the loan amount is reduced so that it represents 78 percent or less  of the property value.  

 Need Cash Down

 Traditionally thought of as a program only for first time home buyers who could  not afford to otherwise finance a home purchase, this is no longer the case.  The substantial run-up in home prices throughout the country means that many  buyers do not have, or do not want to invest, the large amount of cash that is  required in order to put down a minimum of 20 percent on a home. In 2009 FHA insured approximately 30% of all residential mortgages in the United  States. As of February 2, 1010, FHA eliminated loans on a spot-loan basis. This  was a program under which FHA would look at a condominium project for a single  loan and give a thumbs up or down. Now the condominium as a whole must secure  FHA approval before any FHA-insured loans may be made to buyers or residents  living in the community. Unlike the down-payment of 20 percent required for a “conventional loan,” the FHA requires only 3.5 percent of the home purchase price be paid as a  down-payment. FHA also permits a lower FICO score than even Fannie Mae. Finally, in recent years, the maximum FHA loan amount is now competitive with  Fannie Mae loan amounts. Many homeowners find FHA loans to be an attractive  alternative to conventional loans, particularly in hard economic times. But in  order to make a condominium project’s units available for FHA loans project approval must be obtained and renewed  every two years. For projects that previously had FHA approval, those  approvals, if granted before October 1, 2008, will have to be renewed by  December 7, 2010 to remain viable. For those granted after October 1, 2008, the  renewal will be required two years from the date project approval was issued.  

 Condominium project approval is meaningful to the marketability of the units in  a condominium as well. Where greater financing opportunities are available,  sellers in any one condominium will likely find a greater pool of eligible  buyers. Further, the community's certification is a signal to all other lenders that if  the government thinks a particular condominium project is worthy, then it must  be. While Fannie Mae no longer accepts, as it once did, FHA approval in place  of its own approval, it is thought that having FHA project approval is more  likely to lead to spot loan approval by Fannie Mae. The spot-loan approval  process still remains alive under Fannie Mae’s guidelines.  


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