Stricter FHA Financing Rules Signal Need for Creative Modes of Financing
| February 9, 2011 | Posted by Sandie under All Things Rent To Buy, Real Estate, Rent2Buy Concept |
The Federal Housing Administration has changed their condo financing rules, squeezing sellers and creating significant new challenges for the resale of some real estate projects.
According to Orest Tomaselli, CEO of White Plains, NY-based National Condo Advisors LLC, “There were 26,000 condominium developments that would have had to have been recertified by Dec. 7, 2010, and, in fact, my office sent out letters to almost every single one of these developments across the country telling them they were going to lose their approval. Most of them didn’t even know.”
While FHA-approval typically involves a substantial amount of paperwork, the benefit is easier access to FHA financing. Condominium purchasers did not necessarily need to rely on FHA funding in the past, because up until 2007, private lenders were loaning them large sums of money. For those who did want FHA financing, there was something called a spot loan that allowed them to get FHA approval for the particular condominium slotted for purchase.
“In February 2010, the FHA ended the spot loan — replacing it was a process where every single condominium development had to have project approval, which was to be given by HUD (the U.S. Department of Housing and Urban Development), which administers the FHA, and lenders that were delegated FHA lenders,” said Tomaselli. Because of the economic downturn, the presence of private lenders in the market has drastically decreased and the need for other forms of financing has again become an important consideration for developments.
While condo developments used to be able to get approval once and then be set for life, the process has changed. Developments must now get reapproved every two years. The guidelines for approval are stricter than ever, and some developments are reconsidering their need for a partnership with the FHA. But there are drawbacks to relinquishing FHA-approval. Without FHA-approval, condos are seen as less desirable and are at a disadvantage in terms of marketing and value. This is a crucial concern considering the current state of the housing market.
So, what does this mean for you? “When those condo owners want to sell their units and no one can finance,” says Tomaselli, “when buyers can’t get a mortgage because the development is not FHA- or Fannie Mae-compliant, that’s when the pain will rise and everyone will start to scramble to become compliant.”
Rent to buy is an alternative that allows buyers to pay a monthly rental payment on a property and have a portion of that payment go towards the eventual purchase price. For sellers, offering potential homeowners the option to rent to buy the property means a property does not remain vacant, but rather makes money each month until it is purchased. It’s crucial to consider creative ways of financing given the housing market’s current state. Rent to buy is just one option that can benefit buyers and sellers alike in a time when finding a happy ending for either is almost unimaginable.
Read more, in this article from Inman News.
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