The recent changes in FHA financing guidelines will impact sales and the marketability of property in the Chicago area for at least the balance of 2010.
 
As a primer, FHA is the end lender and insurer of roughly 50% of all residential loans written today, both purchase and re-finance. The loan limit for FHA is $417,000 for single family homes and condominiums. With higher loan limits for 2-4 unit buildings ($524,000 - $729,000) they are an even more significant lender for these properties (owner occupied only qualifies).
Just (4) years ago, they represented 5% of these loans. If you are marketing a property that does not qualify for FHA, literally half of the people in the market for that property are eliminated as potential buyers.
 
The FHA 203K program is a critical loan option for buyers of homes in need of repair and has become a favorite of first time home buyers of distressed property in need of cosmetic and minor repairs that will immediately enhance value.
 
Any action by FHA that restricts the ability of buyers to qualify for an FHA loan, or for a property to be considered as acceptable by FHA, lowers demand and creates downward pressure on pricing of the subject property and indirectly for the entire neighborhood or community.
 
Here are some of the major changes, and the related consequences, for you to consider in your business.
 
1. Rising credit score thresholds –
 Currently at 580, FHA has raised it to 620 as a target. While they will continue to underwrite the loans at 580 (or even lower), the rest of the criteria will be tighter. For example, a FICO score under 580 will require a 10% down payment. The current median for the U.S. is 640, down from 680 in 2008. This change may eliminate about 10% of all Americans as homebuyers, and nearly 20% of the currently eligible buyers in the market.
 
2. Rising down payments and lower allowances for seller contributions to buyers at closings –
The down payment floor is 3.5%. Lower FICO scores will require higher amounts. There is continual talk about raising the floor to 5%, but those changes have not yet been implemented. The allowable seller contribution is 3% of the purchase price, the same as for conforming loans. This is lowered from 6%.
 
3. FHA loan fees-
These are no longer capped, and a minimum of 2.25% of the loan amount, up from 1.75%. As with conventional financing, FHA loans are originated by a bank and then sold into a portfolio (bundled) when they meet FHA criteria.
 
The lack of a cap and the higher fees are to offset the higher risk (read future loss) FHA sees in the current market.
 
 
4. Tighter standards for the property –
 In effect, FHA is now looking at both the quality of the borrower and the property. With single family homes, FHA has not significantly changed their guidelines. Be aware, however, that appraisers are not taking a much closer look at condition and flagging potential problems in their reports. This is problematic for no other reason than they are appraisers, not home inspection professionals. Be certain your buyer has a qualified, licensed inspector look at the property they are purchasing, and it is a good idea to recommend a pre-sale inspection of any home you feel may have issues due to age, history as revealed by the sellers, or visible conditions.
 
5. Associations under scrutiny –
The real challenge for sellers and buyers of condominiums and townhomes is the increased emphasis on the overall financial health of the homeowner’s association and the individual creditworthiness of other owners in the building or complex.
This will be a significant barrier this year and perhaps beyond. The major points you need to understand are:

1. FHA will not lend in any building that has not been FHA approved. No longer are “spot” approvals of individual units an option. About 10% of all condominiums in the Chicago area currently are FHA approved.
2. FHA will not lend in any building where more than 10% of the unit owners are 30 days delinquent on their association fees. In a (20) unit building that is (2) or more units. In a building of (10) units or less, it is (1) unit.
3. FHA will not lend in any building where the owner occupancy is less than 50%, or where more than 10% of all the units are owned by any one individual or entity.
4. FHA will not lend in any building where more than 30% of all the loans are already FHA. There is no way to safely determine this right now until FHA has a loan in progress, A database will eventually be available.
5. Any building with a “right of first refusal” in the bylaws now qualifies for FHA financing, AFTER the building is FHA approved. No buildings with this language were FHA approved prior to February 1, 2010.
6. FHA requires an association have reserves of at least 10% of their annual budget, and are requiring a reserve study to determine if the budget and reserve funds are adequate for the building.

1. They have not yet clearly defined what such a process for completing a study  may entail for all associations. For now, they will process these on an individual basis.
2. Associations need to apply for FHA certification. We sent each of you the links for both searching the current database of FHA approved buildings and the guidelines for an association to get FHA approval.                                                

 
 FHA is saying 4-6 weeks from the time a properly completed application          is submitted for a building to get final certification. The certification needs to be renewed every (2) years. There is a sliding scale of cost, with small buildings less than $500 to over $10,000 for a building of 200 units.
 
 
Think carefully about any activity as a selling or listing agent in any building that is not FHA approved. Be sure to ask about FHA qualifications and / or any FHA loan that is part of a related transaction when you are getting information from another realtor, management company or association.
 
Knowing the criteria for FHA approval can be a great introduction to a neighborhood, association and potential clients as an expert in an ever more demanding marketplace.
 
We will continue to post information to you via email and on the company blog about this and other changes in the lending climate.