History of spot loans
The Federal Housing Administration (FHA) originated spot loans in 1996. The goal of spot loans was to allow single loans on smaller projects that chose not to get approved with the Federal Housing Administration or did not make changes to their legal documents in order to conform to FHA project approval standards.
Spot loans were used for the purchase of a single dwelling in a multi-unit building, such as condominiums, that were not on the approved Department of Housing and Urban Development’s (HUD) list. These loans gave lenders the ability to approve a single unit without approving the entire building.
The FHA continued to allow the use of spot loans up until 2010. The program was cancelled because some circumstances posed a risk that the FHA was unable to handle. Unfortunately, some untrustworthy real estate developers were abusing the loans. These real estate developers would apply for and receive FHA spot loans on properties that were faulty and unsafe.
Another problem that existed with spot loans was that the approval form that came with the loan submission package could be filled out by almost anyone. The approval form inquired about the condominium projects, but it was not a requirement that it be filled out by someone who was directly involved with the project. Often, the form was left to be completed by the developer or loan officer, which could result in falsified certifications and documents.
This happened because, at the time, the FHA did not have the ability to properly maintain the oversight of spot loans. Since the FHA could not properly oversee the spot loans they were issuing, and there was a pattern of abuse, they eventually decided that spot loans should no longer be allowed.
Future of spot loans
There has recently been good news for bank lenders, realtors and owners of condominium units who have become frustrated with the prohibition of FHA spot loans for developments that do not have certification. The Federal Housing Administration has been pressured to relax their ban and reintroduce spot loans.
Under current regulations, if an entire project does not have FHA certification, which is based on evaluations of the association’s financial accounts, reserves, insurance, renter-to-owner ratio, and many other factors, then no single dwelling may be eligible for an FHA loan.
The ban of spot loans has greatly affected borrowers with moderate incomes, first-time buyers, minority buyers, as well as existing condominium owners who wish to apply for a reverse mortgage in order to tap into their equity.
The prohibition of spot loans has even had a direct affect on the selling prices of condominiums. In some situations, existing condo owners are forced to lose money when their potential buyers cannot secure FHA loans for condominium purchases.
Currently, there is not an exact time frame or many details on when we might see spot loans again, but the FHA is actively working on a way to reintroduce the loans. This time around, they will have better control and means to oversee the loans.
For more information about spot loans and other financing options, contact Maureen Martin.