Beginning in June of 2009, the U.S. Department of Housing and Urban Development (“HUD”) and the Federal Housing Administration (“FHA”) proposed, implemented, and modified new guidelines regarding the qualification of condominium projects for FHA-insured financing. These guidelines are highly complex and still evolving, and will likely be subject to further modification and clarification by HUD and the FHA over the coming months and years. Nonetheless, every condominium association should have already evaluated the need for approval, or—if your association is FHA-approved already—applied for renewal, since many current approvals expire during December of this year.
These new guidelines are complex and arduous, and immediately affect the majority of condominium communities. Read on to learn more about these new guidelines, the process, and how it affects your association!
What are FHA loans and why should I care?
The Federal Housing Administration (FHA) itself does not issue individual loans to borrowers. Rather, the FHA agrees to insure certain loans, which—in turn—allows the lender to offer a better deal to borrowers. Because the loan is FHA-insured, the lender has less risk exposure and can typically offer lower down payments (as low as 3.5% of the purchase price, as opposed to 20-25% down for most conventional loans), less strict credit qualification criteria, and lower closing costs. A growing number of buyers are turning to FHA loans, either because they can’t currently qualify for traditional financing, or simply because they prefer to take advantage of the benefits.
In light of the recent economic and housing mess, FHA-backed financing offers an attractive alternative to your potential buyers. Four years ago, FHA loans made up 1.7% of all residential loans in the United States; however, by the end of 2009, the FHA had insured roughly 30% of all residential mortgages in the United States (Chicago Tribune, April 2010). Even more staggering are recent reports that, in 2010, approximately 50% of all residential mortgages will have been FHA insured (National Association of Realtors, November 2010). In short, this means that a condominium that is not FHA approved is limiting its pool of potential buyers by half.
What does this mean for your condominium association?
The new FHA guidelines have the potential to severely and immediately impact your condo association in a number of ways. First and foremost, under the new guidelines, buyers of condominiums are no longer eligible for FHA-insured loans unless the condominium project—as a whole—has been FHA-approved. In the past, FHA approval could be obtained for loans on certain units under an individual “spot loan” approval process; however, the new guidelines have completely eliminated this process. Now, the entire condominium project must secure FHA approval before any FHA-insured loans will be made to potential buyers of units. Failure to obtain FHA approval may significantly hinder condominium sales by limiting the pool of potential buyers to those who both can and are willing to obtain conventional financing with its much higher required down payment.
Another significant change imposed by the guidelines is that FHA approval will now last for only two years, after which recertification is required. Projects that received FHA approval prior to October 1, 2008 were initially scheduled to expire on December 7, 2010. (UPDATE: Many of those condominiums that were scheduled to expire on December 7, 2010 have received an extension ranging from a few weeks to a few months. However, according to HUD, no further extensions are likely to be granted).This means that numerous currently FHA-approved condominiums will require recertification in the very near future. You can check if your condominium is currently FHA-approved, and when that approval will expire, at the following website: https://entp.hud.gov/idapp/html/condlook.cfm
Condo association boards of directors should seriously consider seeking FHA approval (as soon as possible) for their association as a means of facilitating sales, maintaining property values, protecting the equity investments of unit owners, and fulfilling their fiduciary duties to act in the best interests of the association.
How do I know if my condominium association is eligible for approval?
In order to be eligible for FHA financing under the new guidelines, your condominium association must meet numerous criteria, including, in part, the following:
- All condominium association governing documents must comply with Oregon law
- At least 50% of units must be owner-occupied
- Projects must meet FHA’s minimum insurance coverage requirements for Hazard, Liability, Fidelity, and Flood insurance (where applicable)
- No more than 15% of units may be more than 30 days past-due on assessments
- No more than 25% of the total floor area may be used commercially
- No more than 10% of the units may be owned by any single investor
- At least 10% of the annual budget must be allocated to reserves
Additionally, any pending litigation or special assessments may significantly decrease the likelihood—or [at the very least] slow the process—of obtaining FHA approval. Other additional requirements apply for proposed or under-construction projects, conversions, and manufactured housing projects. (The guidelines listed are a brief overview; please contact an experienced attorney for more explanation and details.)
What is involved in obtaining FHA approval?
Associations can become certified in one of two ways. One option is to work through a lender if the association already has a potential buyer of a unit to push the process forward. Certain lenders are eligible to certify condominium associations under the Direct Endorsement Lender Review and Approval Process, or DELRAP. Under this process, the association or its manager supplies the necessary documentation and information to the lender. Fees and approval processing time vary by lender and may depend upon the size of the association, as well as company policies.
The second method is for the association to apply directly to the U.S. Department of Housing and Urban Development, which oversees the FHA. This process is called the HUD Review and Approval Process, or HRAP. Under HRAP, approvals are typically processed within four to six weeks if the application is complete and correct when submitted. However, any missing documentation or information will cause the application to be rejected and sent to the back of the line upon being re-submitted. Due to the complexity of the process and the headache of dealing with government agencies, it is recommended that associations hire an experienced attorney to review their governing documents, assemble the necessary documentation, and submit the application to HUD.
Most associations will find themselves best-served by obtaining FHA approval, regardless of whether they currently have a potential buyer, in order to 1) open the door to a significantly larger pool of buyers; 2) offer owners the ability to market their units as “FHA Approved;” 3) help maintain the property value of homes in the association; and 4) avoid possible legal actions by owners against the board or the association for failing to obtain approval.
We can help!
This process involves many complex qualifications and steps, can be extremely arduous (especially due to the fact that the process and its details may depend on your condo’s current situation), and will become considerably more difficult if your application is incomplete and rejected. We are able to assist you with this process, to help make the transition stress-free on your community. Initially, we provide you with a questionnaire to help us gather preliminary information and evaluate the likelihood of your association’s eligibility for approval. We then coordinate and facilitate the gathering of the necessary documentation with the manager or board of directors, review the association’s governing documents for compliance with FHA guidelines, and prepare and submit the accurate, completed application to HUD. In most cases, we charge a flat fee of 2000.00 for preparing and submitting the application. If the association’s governing documents require amendments to comply with FHA guidelines, we can provide this service as well at an additional cost. Feel free to contact us with any questions!
503-684-4111, ext. 207