In late 2009, HUD announced a new process for approving condo developments to be eligible for FHA financing on the units contained in them; unfortunately, a lot of people aren’t aware of the details of how the new system works, causing issues for sellers, buyers, agents, and condo associations alike. Here is a quick overview of how interested parties can get a condo development FHA-approved, including ways that the Ethical Homes team can help to expedite the process.
There are four key points to the new system of approving condos that are important to understand:
First, HUD did away with what were known as “spot” approvals, where individuals looking to purchase a unit in a condo development could get approved for FHA financing even if the development as a whole was not approved; instead, the only way that anyone can be eligible for FHA financing for a unit in a condo development is if the condo development as a whole is on the approved list.
Second, since the FHA approval status of a condo development affects everyone involved–buyers looking to purchase units in the development using FHA financing, homeowners already in the development who want to sell to those buyers, agents and lenders looking to facilitate those transactions, as well as the condo association (which should usually be protecting the interests of the unit owners by keeping the condo development FHA approved, which increases the number of buyers who can purchase units in the development, which in turn increases demand there and helps support property values for the unit owners)–any interested party is in theory allowed to submit an application to get the entire condominium development approved.
However, it’s important to keep in mind that for technical reasons, no application can successfully be submitted without the cooperation of the Board of Directors of the condo association, as well as any management company that the Board may have retained to help manage the association. It’s essential that any interested party get complete buy-in from those entities before spending time and money to attempt to get a condo association approved; while it’s almost always in the best interests of the unit owners (and thus, in theory, the Board that represents them) to allow any interested party to get the entire development approved, we’ve recently seen isolated instances where parties such as the management company or attorneys retained by the Board have advised the Board not to cooperate with outside requests to get the condo development FHA-approved–from what we can tell, for no reason other than so that the entities in question could instead charge the association large sums to perform those same tasks on their behalf.
Third, it’s important to know that HUD now has two pathways that interested parties can follow to process an application for FHA approval of a particular condo development: the HUD Review Approval Process (or HRAP), and the Direct Endorsed Lender Review Approval Process (DELRAP).
When using HRAP, the application is submitted directly to HUD, who will usually take 6-8 weeks to process it. The HRAP application itself is free, but most of the time interested parties end up incurring significant costs in the form of fees paid to attorneys, management companies, etc., to prepare the application for them.
When using DELRAP, the application is submitted to a mortgage lender who has been authorized by HUD to process applications on their behalf, and the approval process for DELRAP usually takes about 1-2 weeks. DELRAP generally costs about $500-$1000 (depending on whether the condo development in question is of recent construction and whether it has been previously approved for FHA financing), which is often (but not always) on par with or less than the fees charged by attorneys to handle an HRAP application.
The documentation needed for an application is the same for both HRAP and DELRAP. For both HRAP and DELRAP, there may also be additional 3rd-party costs involved; for example, condo management companies will often charge fees in the $200-500 range for copies of the documents needed in the application–and they are, sadly, not averse to charging those fees to anyone who needs those documents, including the very associations on whose behalf they are maintaining those documents.
Finally, under the new system, approval of a condo development for FHA financing expires in 2 years, and approvals issued before the change in rules in 2009 (which were originally permanent approvals) were also changed to expire; as a result, the fact that a condo development was previously on the HUD list of condos approved for FHA financing doesn’t mean that it currently is–agents, buyers, and homeowners are all advised to double-check the current status of a particular condo development before making any decisions regarding buying, selling, or refinancing.
As a general rule of thumb, here’s what we tend to recommend for people considering applying to get a condo development approved for FHA financing, depending on who they are and what their situation is:
For sellers looking to put a condo on the market, buyers thinking about putting in an offer on a condo, or homeowners looking to refinance a condo, we recommend going with the DELRAP procedure, as most real estate transactions cannot survive the 2+ month delays that HRAP usually entails. As noted above, it’s essential for either DELRAP or HRAP to have the support of the Board of Directors for the process, so we recommend contacting them as soon as possible to make sure that they will cooperate, and if so, to see whether they might be able to initiate the DELRAP process on your behalf and cover the relevant fees. (Note that any FHA certification costs are NOT considered to be closing costs as part of a sale of an individual unit, and cannot appear on a HUD-1 settlement statement: buyers or sellers needing such an approval as part of an active transaction are advised to negotiate contingencies to allow that process to proceed separately from the purchase itself, and will have to pay any associated fees out of pocket if the Board will not cover those costs.)
For condo associations that are considering getting FHA certification for their condo development, we recommend checking to see how much your attorneys and/or management company will charge to process the application. If that amount is comparable to or higher than the DELRAP fee, then the DELRAP approach usually makes sense; if the cost of attorney’s feed, etc., is less than the DELRAP fee, then HRAP might make more sense. (Depending on your attorney’s level of familiarity with the HRAP process, however, some associations opt to pay a slightly higher fee to go the DELRAP route so that they can be advised by someone who is more familiar with the process.)
Interested in pursuing an HRAP approval? We’ve put together a brief overview of the documents you’ll need to provide as part of your application, and would be glad to refer you to attorneys who can help with filing your application if you need further assistance.
Interested in exploring your options for a DELRAP approval? The Ethical Homes team can process DELRAP applications for you through our wholesale lenders. We do not charge any fees to do so–all you would pay would be the exact DELRAP fee that the wholesale lender is authorized by HUD to charge. Contact us for more details on how to begin that process.
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