On February 1, HUD and FHA rolled out major changes to the condo approval process. Previously, buyers wishing to use FHA financing had two options: If the condo was listed in the FHA’s “Approved Project” database, you were good to go. But if it wasn’t, buyers had the option of going through the (now in hindsight relatively easy and straightforward) “Spot Approval” process, which typically could be completed within 30 days or so at minimal cost. Spot approvals had to be obtained on individual units for each transaction — it was an exception-based process. Given that condos are the main option for many first time buyers, who may lack the 10-20% down payment required in conventional financing, we saw an explosion in the use of FHA financing, which requires just 3.5% down, in the past few years, and a lot of spot approval applications.
The approved database remains in place and is the easiest option, but the new rules scrap the whole Spot Approval system completely, and now require condos to go through a lengthy and expensive HRAP (HUD Review and Approval) or DELRAP (D.E. Lender Review and Approval) process. The good news is that once a community is through the HRAP or DELRAP process, their approval will potentially remain in place for several years and applies to the entire building, and future buyers can simply coast in on that approval. You need only to check the database.
The process is much more cumbersome than the previous spot approval application, though, and these rules are all new. As a result some lenders are deciding it’s not worth the time (4-6 weeks) or cost (several thousand dollars per review) to jump in to this arena just yet. Some are letting other lenders “bite the bullet” on this one and will jump in later, after more condos are through the process and they can ride the coattails of lenders before them.
So what effect will this new hurdle in obtaining FHA financing have on Arlington’s condo market?
In the past 30 days, according to MRIS statistics, financing for sold condos (excluding retirement communities) was as follows:
Surprisingly, more than HALF the sales used Conventional financing! This would indicate that the condo market isn’t going to come to a screeching halt after all. But is there a difference based on price point?
Financing Used in Arlington Condo Sales by Price
Clearly there is heavier dependence on FHA in the under $300K and $300-500K price points, but I’m surprised it isn’t even heavier that this data indicates. This indicates to me that the lower priced condos (under $300k) are going to be disproportionately affected, but also are unlikely to completely halt. And look at the high percentage of all cash deals in that segment!
So it may take us a few weeks, or even months, to get the majority of condos through this painful new HRAP/DELRAP process, but hopefully in the long run it will be easier for everyone. While we’re going through this initial launch phase, keep in mind that settlement times will be MUCH longer (remember that June 30 $8000 credit settlement deadline?) and buyers may incur thousands of dollars in extra cost if they’re the unlucky “first mover” in a building trying to do FHA.
* If you know you are going to use FHA to buy a condo, being under contract by April 30 is NO guarantee that a currently ‘unapproved’ condo can get through this process by June 30. *
*My advice is to get under contract EARLY if using FHA to buy a condo if you’re trying to beat the tax credit deadline. *
And for those who can’t or won’t do FHA, remember ‘cash is king’ and you’ll likely need at least 10% as a down payment for a conventional loan.
And here’s another tip: If you’re looking at condos priced above $400,000 or so, contact me to discuss an important option that you may be completely missing in your search that would completely eliminate this issue!
To start your condo search, contact us — we’d love to help you!
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