FHA Approval Question

[cdtotten]

So a month ago, I sold my condo unit to an individual taking out an FHA loan to purchase. After, I signed a contract to buy a new home myself (via FHA as well). The buyer of my condo asked for 30-60 days to close, so we made sure the contract on the home we are buying covered the same days.

Long story short, the buyer and his sister (mortgage broker for bank) twittled there thumbs and dragged their feet... they finally completed the appraisal last Tuesday (we still haven't gotten the results), and their mortgage broker said "FHA can't spot approve anymore, so we have to send it to them for approval... it will take 30-45 days". Obviously, our contract is up well before then and so is the contract to buy our new home. From what I understand, our only option is to give them an extension of their contract to cover the amount of time possible to get this approved, and ask the seller of our new home to extend our contract as well.

My questions...

- Does FHA truly take 30-45 days to approve the file?

- I had a rate lock I paid for that covered the closing period... now it is useless (although rates are lower currently), do I just have to eat that cost because of the buyer of my condo?

Anything else I should know?My wife is 6 months pregnant and ready to get moved, so this has been very hard on us.

Thanks!

[ShanetheMortgageMan]

Sorry to hear about your situation, particularly with a pregnant Mrs.

I know you didn't ask, but I am saying this for others to read, and that is the agents involved in this transaction royally messed up by accepting an offer with FHA financing on a non-FHA approved condominium without anticipating it'd be need to be approved.  It primarily falls on the listing agents shoulders, but the buyers agent also is to blame.  Particularly these days, when selling or buying a condominium, and accepting offers that are using mortgage financing, it is of utmost importance to make sure that the listing agent specializes in condominiums, or else situations like this are more likely to occur.  One question to ask that will weed out the good agents from the ones you shouldn't use is "Are you familiar with FHA & Conventional condominium requirements, and will you be able to determine if my condominium will be eligible for those types of financing?"

There are still issues that could arise at this point.  Keep in mind there is no guarantee the condo will be approved for FHA financing.  At this point in time, the normal procedure to get a non-FHA approved condo approved for FHA is to go through one of the two approval processes - HRAP (HUD Review Approval Process) or DELRAP (Direct Endorsed Lender Approval Process).  HRAP is where HUD will approved the condo, DELRAP is where the lender will approve the condo (not just a one time "spot" approval, but will approve it for all future FHA transactions as well).  HRAP does take about 4-6 weeks to complete, however DELRAP only takes about 10 business days.  Most lenders do not offer the DELRAP process, as the responsible for determining if a condo meets FHA requirements falls on the lender, and if they don't do it properly it can be a huge liability most lenders aren't prepared to take (the loan won't be insured by FHA).  The below checklist will help you determine if the condo has a good likelihood of getting approved for FHA.

- No Pending Litigation
- 2 Units or more
- Max 25% Commercial Space
- No investor can own more than 10% of units
- No more than 15% of total units in arrears
- At least 50% Owner Occupied
- May not be ineligible project: no condotel, timeshare or segmented ownership or houseboats
- HOA is in Control
- Condo master insurance policy must have 100% replacement cost (unit owner cannot get a gap policy to cover the difference)

Documents that the condo association will need to provide are:

- Recorded Covenants, Conditions and Restrictions (aka CC&Rs, Declarations, Master Deed) - Right of First Refusal ok with no discriminatory language after December 8, 2009

-Recorded Plat Map indicating Legal Description

-Signed and adopted By-laws (recording not necessary)

-Articles of Incorporation filed with State

-Recorded Condo Site Plans or plat

-Actual Budget (or proposed) – must include at least 10% replacement reserves

-Management Agreement, if applicable

-FEMA flood map/flood cert

-HOA Tax ID Number

It is also suggested that the FHA case # (which has already been ordered since the appraisal was done) is NOT ordered until after the condominium has been approved.  Honestly I'm not sure how the FHA case # was ordered as the condo has to already be approved when it is ordered (you have to select HRAP or DELRAP and the condo approval # from HUD's website).  This is something the loan officer will have to figure out, but you should bring this question up to them and require a detailed explanation.

Your alternative is to see if your buyer can also be approved for conventional financing (requires minimum 5% down on condos, but if it's in Florida most PMI companies aren't willing to insure attached condominiums, and then in that case it'd be a 20% down requirement), which the condo would be able to be reviewed as soon as a "Condo Questionnaire" is completed by the condo association/property management and reviewed by underwriting, so could be as little as a few days.

If rates are lower than when you originally locked, your lender may allow you to extend your lock period for free.  If rates are higher, and your lock hasn't expired, most lenders will extend your lock at a cost (typically .25% fee for 15 day extension, but YMMV depending on the lender).

Hope it all works out for you.

[cdtotten]

Shane, thanks for the great response.

I agree that the real estate agents really failed on this one, unfortunately it is a bind I have to work out of. We got the results of the appraisal back today, and it did appraise for full sales price which was nice. When I purchased this condo myself 2 years ago, it was via an FHA loan and they did a spot approval that only took about 2-3 days, so I didn't expect it to be that big of a deal honestly.

Let me ask a clarifying question. My rate lock is at 5% and expires on the 14th or so, rates currently are 4.625 and it appears they will tick lower. Once my rate lock expires on the 14th, can I enter a new rate lock? Based on the turn-around from FHA of 4-6 weeks, we figure it will be late June, first week of July before we close. Obviously, after all this, if we can get a better rate than our lock it would make for a better situation.

[ShanetheMortgageMan]

The spot approval process was eliminated at end of January this year, only the DELRAP & HRAP process is used from February 1st 2010 onwards.  The loan officer definitely should have known that, so shame on them for ordering an appraisal on a non-approved FHA condominium.  This issue should have been caught very early on in the process.  It's not your fault for not expecting this when you have professionals handling a real estate transaction.

Most lenders require the original rate lock to have expired for a certain amount of time, typically 30 days, before a new rate can be locked in.  Within the following 30 days of the lock expiring, a re-lock will usually result in worse case between the original rate when you locked and the current rate.  Your loan officer can provide their lock policy in writing to you.