apartment conversion, not FHA approved (contingency, disclosure, cheapest, appraisal)

[rettigdpm]

My son is buying a condo that is an apartment conversion. It never had an FHA inspection, so it is not eligible for a mortgage from any lender that plans on reselling the loan to FNMA or FreddieMac.

1. I believe this should have been disclosed by the seller.
2. I believe that is grounds for walking away.
3. I believe that it is a defect that would make it harder to sell to a future buyer.

Are these contentions correct?

My son laid out money for an appraisal and a home inspection; now his lender says they cannot produce a loan. They did find a lender that will keep the loan in-house.

4. If he walks away, is there any recourse for the expenses he laid out for appraisal and inspection, since he would not have gotten involved if this defect was disclosed.

[cully]

Does his sales contract have a space to say what type of loan he is going for?

When his loan officer heard it was a condo, one of the first questions should have been is it FHA approved.

The Realtors really should know this too. It's always an issue with condos.

Is there anything in the listing that speaks about what kind of loan not to get, or what loans to get?

That said, I wonder if he was supplied with and if he read the condo declaration and the bylaws, seen a purchaser's hoa disclosure packet that lists various things like the monthly fee, reserve study info, rules and regs, any lawsuits, whether the seller is up to date on his/her dues payments, any special assessments coming up soon, a financial report, etc. Not that that would help him with loan type but just wondering if perhaps some other things were missed as well by agent and loan officer.

[Lovehound]

I believe it is time to see a lawyer, preferably one who deals in real estate. I'm pretty sure most lawyers would give you 15 minutes to discuss your case and see if it's worth pursuing, free of charge. The problem might be easily solved by the lawyer writing a nastygram in legalese for a modest fee.

You hand the nastygram to the seller and they suddenly decide they want to drop your contract and move on.

You are not going to get a reliable answer to your important question in an Internet forum.


I can answer the last part myself. Your appraisal and inspection fees are gone. Those people did their jobs and that is your expense as buyer, whether or not the deal closes. Best you're going to get is your earnest money back and out of the contract. If there is no earnest money that I believe your sole concern should be will you be sued for not completing the sales contract. If not, walk.

[dblackga]

Originally Posted by rettigdpm

My son is buying a condo that is an apartment conversion. It never had an FHA inspection, so it is not eligible for a mortgage from any lender that plans on reselling the loan to FNMA or FreddieMac.

1. I believe this should have been disclosed by the seller.
2. I believe that is grounds for walking away.
3. I believe that it is a defect that would make it harder to sell to a future buyer.

Are these contentions correct?

My son laid out money for an appraisal and a home inspection; now his lender says they cannot produce a loan. They did find a lender that will keep the loan in-house.

4. If he walks away, is there any recourse for the expenses he laid out for appraisal and inspection, since he would not have gotten involved if this defect was disclosed.

1. Disclosed by the seller? No, not really. This is not a "defect". It's a financing issue, not a structure, flood plain or zoning issue. Lots of condos aren't FHA approved. It's nice when they are -- but if that's the kind of condo your son was looking for, he should have made it clear to his agent that he wouldn't look at any units that were NOT FHA approved. Notwithstanding, this is the kind of thing that you discover during due diligence. In this state, anything you find during due diligence, including FHA status, is grounds for walking -- it's very buyer-friendly.

2. What doe your SON believe? Does he like the unit? Can he afford it?

3. It is not a defect. Many, many people buy condos that are not FHA approved -- that's why there's such a thing as conventional financing.

4. No, there's no recourse from the seller. It's not the seller's fault the condo isn't FHA approved. Now, if your son had made it crystal-clear to the agent that this was a make-or-break factor in a deal, and his agent didn't do his research (i.e., pick up the phone, call a lender and say, "Hey, is Winsome Willows Condos FHA approved?") or represented to your son that it WAS FHA approved, then perhaps the agent might offer to pick up the appraisal and inspection cost on the next deal, or throw in a home warranty, etc.

[Rabrrita]

Pretty much what dblackga said is what it is.

It is not likely to be viewed as a defect for not disclosing the FHA issue because in and of itself, it has no bearing on the property. As you mentioned, you did find a lender who will fund the mortgage. What if it was FHA approved but they were going for a VA loan and the VA rejected it? How many and to what degeree must a disclosure be made to cover the buyers financial issues?

The buyer had a duty to ask about anything they feel could impact them based on their personal issues. The type of mortgage the buyer is using is their personal issue.

[rettigdpm]

Some of you are not getting a key issue. My son was NOT applying for an FHA loan. A condo needs to have an FHA inspection (something called a PERS?) in order for it to get ANY conventional mortgage that is backable by Fannie Mae oe Freddie Mac. And I believe that accounts for 90% of conventional loans. So it isn't the problem of getting an FHA mortgage, it is the problem of not being able to walk into most banks or mortgage companies and having them be able to get a conventional loan.

Most of the replies understood that, but some of the later replies apparently do not.

[SmartMoney]

There's something called due dilligence. It's not a defect and there is something called a Fannie spot approval or a streamline approval. Condos get added or drop off the lists, every day. If anyone is at fault (and I use that very loosely), it's his agent for not vetting the condo - but then, agents tend to worry about this less and less and leave it up to the lender. It's too much to keep up with and constantly changes. Agents don't have the resources, but they have lenders that do.

I have people every day go under contract to buy a condo that isn't warrantable (can't be sold in secondary market), they put out money for the inspection, appraisal, then the lender questionnaire. The sharpest tools do the lender questionnaire first, then the home inspection and then the appraisal (from cheapest to most expensive). But getting out of contract...depends. Getting refunds? Not likely - who would he collect from and why?

[gv28]

The bottom line causing your problem is that the government is trying to get away from insuring or bundling condo mortgages.

The PERS, the project review, is of financial matters and statistics, not the buildings.

For the Project Review, if one had occurred, the criteria includes owner-occupancy rate, and a condo-conversion would never have passed that one.

As all have said, this is not a ‘defect’ of the property. It would have been better if either your son’s agent or his lender had raised a red flag when they heard condo, but ultimately it is your son’s responsibly to be knowledgeable in what he is doing.


If it’s done in a timely manner your son may be able to use the loan turndown to get out of the contract and get his deposit back, but if there is in fact a loan acceptance, maybe not.


Condo conversions are all disasters from my perspective. A developer gets a city’s approval and often a subsidy to build an apartment building because the city needs one; then the developer flips it to condos, often throwing the current renters out on the street. The apartments were not built in the quality and nature of being a permanent residence and should never be.


also I think spot approvals no longer exist

[rrah]

Originally Posted by rettigdpm

My son is buying a condo that is an apartment conversion. It never had an FHA inspection, so it is not eligible for a mortgage from any lender that plans on reselling the loan to FNMA or FreddieMac.

1. I believe this should have been disclosed by the seller.
2. I believe that is grounds for walking away.
3. I believe that it is a defect that would make it harder to sell to a future buyer.

Are these contentions correct?

My son laid out money for an appraisal and a home inspection; now his lender says they cannot produce a loan. They did find a lender that will keep the loan in-house.

4. If he walks away, is there any recourse for the expenses he laid out for appraisal and inspection, since he would not have gotten involved if this defect was disclosed.

It is not a defect and did not need to be legally disclosed (although maybe some seller's disclosure form somewhere requires that, I doubt it.)

You son maybe able to get out of the purchase based on the inability to obtain a mortgage. Again, HIS contract will determine this. What does his contract say about the type of mortgage he must be able to secure? If he is able to get a mortgage from a lender that will keep it in-house, is it not likely that a future buyer maybe also be able to do so?

No, he has NO recourse for his expenses.

BTW--it's rather rude to come to a forum, ask a question, and then chastise people by essentially telling them they are too stupid to understand the questions or situation. I've said this here before to posters such as yourself, but not liking an answer does not mean it is incorrect or that people responding don't understand.

[rational1]

> it is the problem of not being able to walk into most banks or mortgage companies and having them be able to get a conventional loan.

It all depends on exactly how the financing clause was written.

USUALLY people write "seller must be able to get a mortgage for at least X years for at least Y dollars with an interest rate less than Z."

It would be unusual to specify the exact type of loan.

If not...suppose the buyer's bank says no...in principle the SELLER could offer to take back the mortgage at the specified terms. And the contingency would be satisfied.