Condo Owners: Do you incur additional risk to admit a new co-owner to your Assn. with FHA financing?

Question

A realtor is asking the co-owners of my condominium association to amend and/or waive certain provisions in rules so as to allow a new buyer with FHA financing to become a co-owner and member of our association. We will have a meeting about this shortly but I am curious what would be the additional risk we are being asked to take on to allow in a buyer with FHA financing via an amendment or waiver to our rules? My sense is that they could be marginal buyers credit-wise without the FHA financing and guarantee.

If they default on their mortgage payments, how quick will the FHA be to step in their shoes and make payment for them? Won't that become a troubled loan / workout situation such that residual services like property insurance & maintenance fees may become compromised by non-payment from this new member, not able to pay their mortgage?

If your condo rules prohibited FHA backed owners, would you waive that rule to allow them to purchase your co-owned property?

Answer 1

Only problem i would see is that they are asking you to lift the sansions on your CC&R`s about FHA fundings. FHA requires a lot for its new owners and may require your association to replace a roof. This could cause you future costs for the association down the road.

Answer 2

I have seen provisions like this in condo by-laws before and they exist mostly to attract "better off" residents but occasionally these types of clauses exist to protect the condo association autonomy from FHA guidelines. FHA has its own set of rules to identify a property as being fit and safe including things like exterior hand rails with a certain amount of steps (I think 3 or more) and other exterior requirements. To not allow an FHA buyer doesn't subjugate the condo association to these rules.

You are right to be wary of an FHA buyer being a credit risk, but it is not true 100% of the time. Still, if this buyer really wanted the property, and they weren't a credit risk, they could simply opt for a different loan program. I think you should keep the bylaws as they are.

By the way, FHA doesn't pay the mortgage on a defaulting borrower. They pay off the loan to the primary lender and sell the property themselves (including the monthly fees in arears when the property sells).

Answer 3

The reason behind the Realtor wanting to change your CC& R's is to allow the transaction to close. Otherwise his buyer is out of a home (there is no guarantee the loan will go through either right now)and he is out his commission. The condo association will have to factor in if they were to allow any one in that could default on their loan,would they risk the values of other properties locatied in the complex and chance that the property goes into foreclosure with the very real possibility of the property being neglected. Therefore evey condo owner might have a lower value property than if they didn't allow the changes. Your HOA board should consult an attorney as this is also a borderline question of discrimination and the buyers could take the HOA to court,although highly unlikely.

You need to ask at the meeting what difference would it make to allow these buyers in versus a owner renting out their condo to someone who doesn't pay rent, is noisy and allows drug or alcohol traffic through the area. There is more to it then meets the eye and I hope that everyone involved keeps an open mind to the situation at hand so that there is a all around solution.

Answer 4

It is illegal to make acceptions for certain units, unless you are going to accept FHA financing across the board.

In my market. when properties are over $150K , it is very common for sellers to state that they will not entertain FHA/VA financing, and they are well within their rights to do so. That is to ensure more qualified buyers come to the table.

You are correct that FHA/VA buyers are marginal buyers, and if that doesn't go with the flow of your CA, then that is a legal way to remedy the situation.

However, you are incorrect on one aspect...FHA DOES NOT step in and make the payments in the event of a default...the MIP that insures the FHA loan is for the lender..not the buyer..so the same foreclosure process would apply.

It is also not fair to the rest of the homeowners, that thought they were purchasing into a CA that had those restrictions, if they are later waived.

That would be detrimental to overall property values. I have seen HOA's and CA's, when the standards start to be lowered by the powers that be, then that can send a panic across the residence and people will start selling to get out.

One of the first houses I bought for myself, the neighorhood started going down quickly in year 3...I sold that same year...that was 14 years ago...in that same neighborhood, I could buy that same house for $10K LESS than I paid for it 14 years ago.

I would vote no.

Answer 5

If you don't amend the rules, which I would think it would be illegal not to, then FHA loans would not be attainable on your properties. The result of this will most likely be significant reduction in value.