Before You Shop for a Condo, Pre-Qualify Your Lender First

Via Charles Dailey (iLoan):

If you’re a FHA buyer shopping for a condo, you’d better pre-qualify your lender first. If you’re listing a condo and a buyer gives you a FHA pre-approval letter, you’d better pre-approve that lender first. Because Spot Approvals are a thing of the past, it’s important to know which of the two remaining FHA condo approval processes your lender will be using: Direct Endorsement Lender Review and Approval Process (DELRAP) or HUD Review and Approval Process (HRAP) as outlined in MORTGAGEE LETTER 2009-46 B.

DELRAP is only available to lenders who have unconditional Direct Endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects. They also have the option to use the HRAP method if they prefer (usually if they’re not sure on the project or feel “iffy” about it). HRAP is the method all lenders will use who fit into one of the 3 following distinct categories:

• Lenders who don’t have unconditional Direct Endorsement authority from HUD
• Lenders who lack staff with knowledge and expertise in reviewing and approving condominium projects
• Lender who despite being adequately staffed and having Direct Endorsement authority are too cowardly to exercise original thought in underwriting, follow the guidelines and sign off on projects – thereby assuming some risk (this may sound funny but expect this to include many lenders)

Since evaluating the eligibility of an association is the same between DELRAP and HRAP, the only difference between the two is who does it, or more importantly, how long it takes. It takes a considerably longer amount of time to get the approval under HRAP. This extra time has implications for finance contingencies, rate locks, expiration of tax credits and much more.

One could try affirming that their condo association is approved in the FHA-approved condominium projects website but good luck with that! It would be wiser to make sure that your lender uses the DELRAP method of approving associations. Additionally, if your lender uses DELRAP but decides to use HRAP on your particular association, it would behoove a Realtor and buyer to look into why this decision has been made as it may indicate some level of ill-health in the association that a buyer might want to know about.

It’s one thing to be aware of a guideline change or that one is happening. It’s another thing to read between the lines, understand the potential consequences and steer clear of potential problems. Let’s get ahead of this one!