After the 2008 market pitfall, a whirlwind of change hit the real estate market in Miami-Dade and Broward counties. Foreclosures were everywhere and at an all-time affordable price. Suddenly, the average consumer shied away from buying and the cash investor became the ideal buyer [for realtors and sellers] to hope for. The regular market was at a stand-still… But then there was FHA! The Federal Housing Administration created loans for lower income families where they could purchase a home with a down payment as low as 3.5% for loan up to $345,000! However, in order to obtain an FHA loan on a condo, the entire complex must meet their long list of requirements. Such requirements range from a minimum amount of investment owners within the community, to a minimum amount of reserve funds available within the condo budget.
What is a reserve fund? A reserve fund for an association is like a savings account for emergencies. For example, if a hurricane strikes and tears out or damages the roofs of the buildings, they use this money to fix it. Without a reserve fund, the association is forced to impose a special assessment (an additional HOA fee for a limited time frame) in order to perform the repairs needed.
Here’s another kicker… Almost 90% of all condominiums in Miami-Dade County are not approved by FHA, Fannie Mae or Freddie Mac. “Lenders are requiring buyers to make down payments from 20%-30% of the purchase price in order to qualify for a mortgage, if financing is available at all,” says Danielle Blake, Senior Vice President of Housing & Government Affairs of the MIAMI Association of Realtors. She continues, “The reserve requirement was one of the two main barriers that we identified. FHA, Fannie Mae, Freddie Mac and most portfolio loans require it. However, Fannie and Freddie have a limited or streamlined review process where reserves are not required, but the down payment requirement is 25% in Florida. In other states, the down payment is 10%.” Since late 2014, Blake and her team of local professionals began a committee to make a change and lower the down payment requirement to the realistic 10% that other states are requiring.
Michael Ortiz, our in-house Loan Consultant from Caliber Home Loans, is one of the members of this committee. I recently sat down with him and asked him some questions to better understand what exactly is going on. And the bigger question… “WHY?”
Why is there a required minimum of 20-30% down payment for condos? Those specific guidelines are set by Fannie Mae and Freddie Mac themselves. These higher down payment requirements only apply to Condominiums in the state of Florida [Refer to Fig. 1]. The reason that Florida has higher down payment restrictions is because of the large amount of fraud that took place particularly in Condominiums during the boom from 2003 – 2008 and the devastating financial repercussions it has given the associations themselves.
Fig.1: Provided by Michael Ortiz
What is going on with the issue of reserve funds and how is this affecting the down payment amount? The effects of the real estate market collapse left a lot of HOA’s in the State of Florida in financial hardship. Many of them in Miami-Dade and Broward Counties still have a deficit in their balance sheets from unpaid monthly assessments from vacant units going through the foreclosure process. Fannie Mae & Freddie Mac do not have a requirement for a lump sum that an association should have in their reserve account but they do require that the association collect 10% of the income on the budget specifically for reserves. As you see in the matrix above in the rest of the country if a condo project does not have the needed reserves the project qualifies for a 10% down payment for a Primary Residence, 25% down payment for a Secondary Residence, and Investment Properties do not qualify. If a project does have the 10% reserve requirement the down payments would be 5% when purchasing a Primary Residence, 10% when purchasing a Second Home, and 20% when purchasing a condo as an Investment Property.
What is the goal of this movement and when do you think we can look forward to an improved condo market? The goal of this movement is to make more management and association companies aware of the impact that this will have on the financing that will be available specifically to owner-occupants. [Refer to Fig. 2]
Unfortunately, it is not ideal right now for the typical low to middle income family to search for a condo unless they have enough funds for a hefty down payment plus closing costs, or unless they find the needle-in-the-haystack condo with the 10% reserve requirement where they can qualify for a 5% down payment loan. At least it is a relief to know that our local professionals are working together to make a positive change so that more people can really qualify to buy [even a condo]. Meetings have been taking place and our local task force has created ambitious goals. We will keep you informed and hope to have an update soon regarding the outcome of the committee meetings.
Fig. 2: The current FHA approved Condos vs. The Goal of the Committee
By: Myrissa Leon