FHA Certification does two things for a community association and its members: it allows residents to obtain a Home Equity Conversion Mortgage (HECM) and it opens up the pool of eligible homebuyers who are seeking FHA-backed loans when purchasing their home.
An HECM is a reverse mortgage which is a loan that is available to qualified homeowners who are 62 years or older. A reverse mortgage enables seniors to stay in their homes while they receive advances on the loan, the repayment of which is secured by the equity in their homes.
An in-depth discussion on the pros and cons of a reverse mortgage is beyond the scope of this blog but a major advantage is that it does not need to be repaid as long as the homeowner resides in the property and does not otherwise default on the loan (i.e.. by failing to mainteain property insurance or by not paying property taxes).
Some private banks do offer reverse mortgages, however, the only reverse mortgage product insured by the U.S. government is the HECM which is insured by the FHA.
With regard to the second part of the certification equation, FHA loans permit a lower down payment which makes them very attractive to homebuyers. In 2009, FHA loans comprised approximately 2% of the loan market; in 2010, that figure had climbed to 40%. Given the popularity of the FHA loan product, not being certified means community members may have a much smaller pool of people interested in buying their homes.
There are basic eligibility requirements which must be met in order for a community association to receive FHA certification. The certification process is not nearly as complicated or costly as some people believe. Well-managed and financially stable communities typically experience no problems in becoming FHA certified. If your community wishes to be certified by the FHA, the following guidelines must be met:
-No more than 15% of your units can be delinquent for more than 30 days.
-At least 50% of the units must be owner occupied.
-At least 10% of the association's budget must be allocated for reserve funding.
-The association must have adequate insurance coverage.
-There can be no pending litigation other than routine collection activity.