What Is the Fannie Mae Program?
The Federal National Mortgage Association (FNMA), or “Fannie Mae,” is a federally-supported company that Congress originally chartered. It is intended to assist in mortgage securitization, which ensures that lending institutions, such as banks and credit unions, have the funds to loan money to purchasers of single-family residences or other residential units, such as condominiums.
What Is Freddie Mac?
The Federal Home Loan Mortgage Corporation (FHLMC), or “Freddie Mac,’ is similar to Fannie Mae. It was created in 1970 to enlarge the secondary market for home mortgage loans in the U.S. As Fannie Mae does, Freddie Mac buys mortgages, pools them, and sells them as mortgage-backed securities to investors.
This market for mortgage-backed securities has the effect of increasing the supply of money available for mortgage lending. It thus increases the supply of money available to consumers for getting mortgage loans to fund new home purchases. This can lower interest rates and make mortgage loans more affordable to more people.
What Role Do the VA and the FHA Play in the Home Loan Market?
The Veterans Administration (VA) and the Federal Housing Administration (FHA) are two other players in the home mortgage loan arena. Mortgage loans from the VA are available only to veterans of the military branches and their families. Loans from the VA allow borrowers to take out a mortgage loan with no down payment. They are quite popular, both in Florida and elsewhere.
The federal government offers FHA loans at lower interest rates than those on the open market. Loans from the FHA allow people to buy condos and other homes at a lower price than they would pay otherwise.
What Is VA and FHA Approval of Condos?
The issue is that the VA and the FHA must approve condominium communities and projects if people want to use VA or FHA loans to finance their purchases. Not every condo project can get approved by the VA and FHA. A condo association must apply for approval, and only some that apply are approved.
If a person wants to buy a condo unit in a project that has not already been approved, then the person would have to go through a time-consuming procedure to get a condo community approved. Or the residents of a condo project interested in making their units as marketable as possible would go through the procedure, so potential buyers of all units can get VA or FHA loans if they otherwise qualify.
Below is detailed information about how a condominium project can obtain FHA approval. The VA has its own extensive approval requirements, which can be reviewed online.
How Does a Condo Community Get FHA Approval?
Condominiums must meet a set of FHA requirements if buyers are going to qualify for mortgage loan approval. However, most condominiums do not qualify for FHA approval. Only some do, and this limits the availability of condominiums to people who might be interested in them as a lower-cost housing option.
Many condo communities do not pursue the FHA approval process because it is expensive and difficult. This means that the only way for a borrower to get a condo is with a conventional loan.
With a conventional loan, there are many fewer requirements to meet. Other than certain basic industry standards, no other requirements would prevent you from getting a conventional loan for a condo.
On the other hand, FHA loans have a set of stringent requirements for condominium projects. A person cannot get an FHA loan to buy a condo unless the FHA has approved the condo project in which it is located.
What Is Required for FHA Approval of a Condo Community?
The requirements for FHA approval of a condo community are as follows:
- Substantial Completion: The project must be substantially completed. This means the residential units and common area structures must be finished, such as swimming pools, clubhouses, and parking lots. Only minor aspects, such as landscaping, can remain incomplete;
- Adequate Insurance: The condo project property must be adequately insured.
The condominium association owns the common property in a condo community. The condo association also owns the physical structures of the housing units, and each individual owner of a unit owns only the interior of their unit from the exterior walls.
- In assessing whether a condo community qualifies for FHA approval, the FHA reviews the master policy of the condo association to see if it provides all the insurance coverage required. The FHA approves a condo community only if its insurance coverage is adequate;
- Limit on Ownership by One Investor: A single investor may own no more than 10% of the total number of units in the association;
- Location of Condo: The FHA will also look at the location of the condominium project. It wants to see that the condo is within a reasonable distance from a well-traveled road, a railroad, an airport, or a military airfield. It should not be in a flood zone; if it is, it must have flood insurance. The condo should not be located near a landfill or a dump. It should have been constructed on stable soil in a place that does not pose structural problems;
- Owner Occupancy: The owner occupancy rule of the FHA also applies to condominium properties, and the FHA requires that at least 50% of the units are owner-occupied or sold to owners that intend to occupy the property;
- Capital Reserves: The FHA will also review the reserves of the condominium to ensure that it has enough money to replace all structures, such as the exterior of the condo structures, sidewalks, roads, and other amenities. A condo association should have had the adequacy of its reserves reviewed within the prior 12 months;
- Homeowner’s Association Dues Payment: To ensure financial integrity, the ability to provide maintenance and adequate insurance coverage, the FHA mandates that no more than 15% of units can be behind in their homeowner’s association dues payments;
- Bylaws Review: The FHA reviews the bylaws and covenants of the condo association to make sure there are no provisions that violate the Fair Housing Act and that the bylaws do not affect a mortgage lender’s right to foreclose on a unit;
- Restriction on Resort Properties: The FHA prohibits condominiums that double as resort-type properties, commonly called “condotels,” so the FHA wants to ensure that buyers purchase their units for use as primary residences and not resort rentals;
- Limited Commercial Use: As noted previously, the FHA only approves residential condo communities. It is not approved if more than 25 % of a project’s floor space is designated for commercial use, e.g., office space and retail.
A person who wants to use an FHA loan to buy a unit in a condo project is limited to buying a project on the FHA-approved list.
It takes time to get FHA approval. It also involves submitting quite a bit of documentation, and it has a cost. So many condos do not even attempt to get approval, or they may have tried to win approval and been denied.
Can I Get a Conventional Mortgage Loan for a Condo in Fort Lauderdale?
Since the approval process for acquiring a VA or FHA loan is long, or such loans may not be available, as explained above, the bulk of condo financing is left to conventional condo loans in Fort Lauderdale and other Florida areas.
Still, a condo project has to pass a review by the underwriting department of the mortgage lender before a person can be awarded the loan. Fannie Mae and Freddie Mac are responsible for the nationwide underwriting of most conventional loans.
Recently, in response to the hardships that the condominium market has experienced in the Fort Lauderdale, Florida area, Fannie Mae created a “Special Approval” designation specifically for purchasing condominiums in Florida. The strict requirements previously enforced may have been lifted for certain condominium units that qualify for the Special Approval designation.
What Are Full and Limited Review Condo Approvals?
Generally, aside from the Special Approval program, Fannie Mae and Freddie Mac have created two categories of condo approvals. The “Limited Condo Review” refers to a program that is offered for loans that are considered low-risk loans. Condos underwritten as limited condo review loans are more likely to be approved.
Condominiums underwritten under the limited review program are much more likely to win approval than those submitted under the full review program. In South Florida, for example, less than 10% of loans submitted for full condo review win and close. So, borrowers often choose a limited review condo mortgage loan.
What Kind of Loans Are Eligible for Limited Condo Review?
The loans that qualify for limited review are as follows:
- Conventional Fannie Mae and Freddie Mac Loans;
- Condos to be used as primary residences or second homes only;
- The loans are available for purchase, rate, term, and cash-out refinances;
- The buyer’s credit score is not a consideration in determining eligibility for limited review.
The maximum loan-to-value rates must be as follows:
- For a primary residence: Maximum financing of 75% on a 1st mortgage and 90% combined financing on a 1st and 2nd mortgage;
- For a second home: Maximum financing of 70% on a 1st mortgage and 75% combined on a 1st and 2nd mortgage;
- For an investment property: A maximum of 70% financing on a first mortgage and 75% combined financing on a 1st and 2nd mortgage.
“Full review” condos require a more detailed underwriting analysis for loan approval. The things that most often cause a denial of a Fannie Mae and Freddie Mac Full Condo Project Review are as follows:
- The Condo Association Budget: The approved budget for the current year must show that 10% of the operating expenses are to be allocated to reserves:
- A maximum of 15% of the unit owners may be over 60 days delinquent on their monthly HOA dues or special assessments;
- A maximum of 50% of the units can be investment properties Fannie Mae Loans;
- A maximum of 49% of the units can be investment properties Freddie Mac Loans.
How Do I Know Whether to Request a Limited Review or Full Review Loan?
Factors that a person should consider when deciding to ask for a full review or limited review loan are as follows:
- Go online to see the Fannie Mae Approved Condo List and search for the list of fully approved condos in Fort Lauderdale;
- A person should find out if a condo offers hotel services or centralized rentals;
- Get a copy of the current year’s approved budget before buying. It should not be difficult to obtain. It is a quick way to find out if the project may be eligible for a full review approval or not;
- Obtain copies of documents showing all kinds of insurance coverage. A quick review of the insurance basics by a Foundation Mortgage Banker can tell a prospective buyer if any deficiencies would defeat eligibility for Limited or Full Review approval;
- Ask for copies of any pending litigation in which the association is involved;
- Order A Condo Questionnaire at the beginning of the loan process. The association may charge anywhere from $75 to $250 to complete the Condo Questionnaire. Getting this information at the start of the process helps a person discover if there are problems early on;
- Make sure to line up an insurance agent for an HO6/Contents Policy at the beginning of the process. This is required to get an approval request submitted.
I Have Also Heard of “Special Approval” Designation Loans in Fort Lauderdale. What are These and How Can They Help?
In the past, it may have been difficult to obtain a mortgage loan for a condominium unit in Ft. Lauderdale, Florida, under the Fannie Mae program. This was because of very adverse market conditions in past decades and strict eligibility requirements imposed on those seeking mortgage loan approvals.
For example, many purchasers of condo units did not qualify for a mortgage loan unless the borrower could make a down payment of 20% of the purchase price or even higher. This may be true with some lenders even today.
In addition, there was and still is an issue in that a condominium project must pass a full review by a loan underwriting department before a potential purchaser can be awarded a loan that Fannie Mae or Freddie Mac underwrites.
Which Types of Condos Are Eligible for Special Approval?
The first requirement for eligibility under the Special Approval program is that the seller’s loan must already be securitized under the Fannie Mae program. New loans can qualify on a case-by-case basis. The following factors are weighed in determining if the requirements will be waived:
- The financial stability and longevity of the particular condo project;
- The size and nature of the unit, such as how it is and the character of the building in which it is located;
- Any related costs and fees, such as monthly homeowner association (HOA) dues and insurance premiums;
- The property’s current condition and habitability.
Fannie Mae maintains a complete list of condominium projects that have already been approved. A person can go online to learn whether a condo they may want to purchase has the Special Approval designation.
Should I Hire an Attorney to Help me with my Ft. Lauderdale Condo Mortgage?
It is hoped that the Special Approval program will help stimulate the Fort Lauderdale condo market.
Otherwise, loans are available to fund the purchase of condos in Fort Lauderdale, but a buyer who needs a mortgage loan may have to do some work to win loan approval.
If you are having trouble getting a mortgage loan to buy a condo in Fort Lauderdale, a mortgage lawyer in Fort Lauderdale, FL, can help you. Whether you are selling or buying a Fort Lauderdale condo, a lawyer can help buyers qualify for mortgage loans. They can help you stay up-to-date in the ever-evolving market for condominiums in Fort Lauderdale and other markets in Florida.