111 Monroe Street banks on FHA approval

111 Monroe Street

If new Bedford-Stuyvesant condominium 111 Monroe Street had gone on sale a year ago, brokers likely would have touted its white oak plank flooring, 10-foot ceilings and Corian countertops.  

Instead, the condo’s key selling point is its Federal Housing Administration-approved status, which offers qualified buyers more than 95 percent financing through mortgages insured by the federal government.

“We’re expecting this to be a pretty resounding success because of the fact that in these hard times, you can put 3.5 percent down,” said David Behin, an executive vice president at the Developers Group, the exclusive agent for the 29-unit building.

In the easy-credit days of the mid-2000s, New York City developers generally avoided the expensive and time-consuming process of seeking FHA approval for new condos. But in a climate where financing for buyers is increasingly hard to come by, many are changing their tune, brokers say.

Behin said 111 Monroe is one of several projects he is working on where the developers are seeking FHA approval, though he didn’t name them since the process isn’t complete.  

“It’s a bit of a stop-gap measure for this market,” Behin said. “Everyone’s trying to figure out a way for qualified buyers to be able to buy. This is one of the ways we’ve been able to figure out, and I think it’s a very good solution for people.”

Congress created the Federal Housing Administration in 1934 to spur a housing market flattened by the Great Depression. FHA mortgage backing provides lenders with protection in the event of a homeowner’s default, and because the lenders bear less risk, FHA-insured loans require smaller down payments and allow more flexibility in household income and payment ratios, though they do require the lender to pay an insurance premium.

But FHA-backed mortgages are unlikely to single-handedly jumpstart the market, since they aren’t an option for everyone.

There are income documentation and credit requirements, although the requirements are generally more flexible than with other lenders. In addition, home prices must be under a certain dollar amount, which in New York City is $729,750. That means FHA loans are more useful in the boroughs than in Manhattan, where the average apartment exceeds $1 million. And like most lenders, FHA requires that at least half of the units in a condo be sold before it will guarantee loans in the building.

For a condo to be FHA-approved, the developer must put certain protections in place, such as having a reserve fund and a 10-year structural warranty, that most New York City projects don’t have, Behin said.

Because of the red tape and extra expenses involved in meeting those requirements, developers in recent years often didn’t bother with FHA approval, especially since it was easy for buyers to get 90 or 95 percent financing from lenders, Behin said.

But things have changed.

“Now that the lending standards have gotten tighter, more people are using [FHA],” he said.

FHA loans have become more popular across the country, filling the void left by subprime lending, said Adam Glantz, a spokesman for the New York bureau of the U.S. Department of Housing and Urban Development. In 2006, he said, FHA backed only about 3 percent of home loans in the country. Now, that number has mushroomed to 30 percent. In part, that rise had to do with popular seller-funded down payment assistance programs, which were beginning to gain traction in New York City before they were banned this fall amid reports of high default rates.

The growth of FHA-backed loans has continued despite the end of down payment assistance programs. In New York City, the number of FHA-backed loans issued between January and March of this year leaped to 2,315, up from 995 in the same period of 2008, Glantz said.

“Now that the subprime market has disintegrated, people are coming back to FHA,” he said.  

At 111 Monroe, a buyer could purchase a $375,000 apartment with a down payment of only $13,125, the Developers Group’s Behin said. As an incentive to buyers, the developer is paying the mortgage insurance premium that is required with FHA loans, he said, as well as buyers’ closings costs.

Nearby condo development 105 Lexington Avenue in Clinton Hill is also FHA-approved, said project developer Donald Leonard. He said when the project went on sale in April 2008, 105 Lexington was only one of a few projects in the neighborhood that received FHA approval.

But the status has had only mixed success in combating the difficulty of getting financing in the credit crunch, he said. Since the 32-unit building is only about 30 percent sold out, FHA loans aren’t yet an option for buyers.  

“We think it will be more beneficial on the back end,” he said.

Behin said the developer at 111 Monroe will allow early, qualified buyers to put down 3.5 percent, believing that by the time buyers begin to close, more than 50 percent of the units will have been sold.