A great deal of confusion currently surrounds the issue of FHA approval for condominiums. I get phone calls on an almost daily basis from board members and managers who are curious, confused, or confounded by all the recent changes to the FHA approval process. To help alleviate some of this confusion, I felt it would be helpful to provide a brief overview of the approval process itself, clarify recent developments in this area, and address a few of the common questions that owners, board members, and managers have been asking.
What is all this fuss about “FHA Approval” anyway?
For those unfamiliar with the background and recent news surrounding FHA approval for condominiums, here is a [very] brief overview: The Federal Housing Administration (FHA) is a government agency that provides mortgage insurance on loans made by FHA-approved lenders and is a subdivision of the US Department of Housing and Urban Development (HUD). During 2009, HUD published a series of new guidelines that dramatically changed the FHA approval process for condominiums. The most significant changes were as follows:
- Each condominium project as a whole must now obtain FHA approval before any individual unit in the project will be eligible for FHA financing. Prior to the recent changes, it was possible to obtain an FHA loan on an individual unit even if the condominium project was not on the list of FHA-approved condominiums. However, this “spot loan” approval process was completely eliminated by the new guidelines.
- Condominium project approval now expires every two years. In the past, once a condominium project received FHA approval, the approval was more or less indefinite and had no fixed expiration date. Once a project is approved under the new guidelines, it will need to go through a [supposedly more simple] recertification process every two years to ensure continued compliance with FHA guidelines.
- The details of the application process itself, the exact eligibility requirements that condominiums must meet, and the required documentation that must be submitted with applications have all changed significantly.
All projects approved under the old guidelines have either already expired or will expire in the very near future. You can check the following website to verify whether your condominium is FHA approved, and if so, when the current approval is set to expire: https://entp.hud.gov/idapp/html/condlook.cfm
Is FHA approval really all that important?
In order to address this question, it is helpful to first understand a bit about FHA financing. The Federal Housing Administration (FHA) itself does not issue individual loans to borrowers. Rather, the FHA agrees to insure certain loans that, in turn, allow 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 (often) lower closing costs. A growing number of buyers are turning to FHA loans, either because they currently cannot qualify for traditional financing, or simply because they prefer to take advantage of these benefits.
In light of the still-lingering economic and housing mess, FHA-backed financing offers an attractive alternative to potential homebuyers. According to recent reports, the FHA’s share of new loans increased from 7% in 2007 to 37% in 2009 and 36% in 2010 (Federal Financial Institutions Examination Council press release, September 22, 2011). In short, this means that a condominium that is not FHA-approved is limiting its pool of potential buyers by more than one-third of the market.
What factors might prevent a condominium association from obtaining approval?
In order to be eligible for FHA approval under the new guidelines, condominium associations must meet numerous criteria. A few of the major eligibility factors that will be considered include the following:
- Pending or recent litigation – will often prevent eligibility, particularly if involving construction defects.
- Pending or recent special assessments – not an automatic disqualifier, but a major red-flag that must be disclosed and adequately explained.
- Adequate budget and reserve funding – typically, the association’s budget must clearly reflect that at least 10% of the total budget is allocated to reserves (when this requirement is not met, a recent reserve study must be submitted to show the adequacy of reserves).
- Owner-occupancy ratio – at least 50% of units must be owner occupied.
- Adequate insurance coverage – in particular, many associations have insufficient fidelity (also known as “employee dishonesty”) insurance coverage.
- Delinquent assessments – no more than 15% (20% if certain other conditions are met) of units may be more than 30 days past-due.
- Commercial use – no more than 25% of the total floor area (of an individual unit or of the condominium project as a whole) may be used for commercial purposes.
- Investor ownership – no more than 10% of the units may be owned by any single investor.
- Governing documents – any provisions that violate FHA guidelines may need to be amended (for example: certain types of rental restrictions or restrictions on an owner’s right to convey a unit will be problematic).
Please note that the above list is merely a summary of a few of the major factors involved in determining a condominium project’s eligibility. Numerous other criteria may also come into play and must be evaluated. Feel free to contact us if you have specific questions relating to the potential eligibility of an individual project.
What recent changes should I be aware of?
On June 30, 2011, FHA issued revised lending guidelines that, yet again, made significant changes to the FHA approval process for condominiums. This most recent guidance came in the form a new FHA Condominium Project Approval and Processing Guide—a 95-page beast of a document—that completely replaces all prior guidelines and becomes the only “official” approval guideline for condominiums.
Although the intent of this new guide was to clarify and consolidate the complex details and requirements of the approval process, the process is—in reality—no easier to understand than before. While the guide did help to clarify a few previously ambiguous eligibility requirements, it also introduced a number of controversial requirements, the most notable of which is a Project Certification that must now be signed and submitted with every FHA approval application.
The Project Certification is so broad and unrealistic in its scope that it could make any board member or manager preparing and submitting an FHA application think twice before signing. The submitter must certify to the following three items:
- The project complies with all state and local condominium laws and all FHA condominium approval requirements;
- The information and statements contained in the application are true and accurate; and
- “The submitter has no knowledge of circumstances or conditions that might have an adverse effect on the project or cause a mortgage secured by a unit in the project to become delinquent (including, but not limited to: defects in construction, substantial disputes or dissatisfaction among unit owners about the operation of the project or the owners association, and disputes concerning unit owners, rights, privileges, and obligations). The submitter understands and agrees that the submitter is under a continuing obligation to inform HUD if any material information compiled for the review and acceptance of this project is no longer true and correct.”
Of particular concern is the “continuing obligation” to inform HUD of any changes in circumstances post-approval that might affect any of the eligibility criteria. It is unclear at this point exactly how broad of an obligation this may impose on the either the condominium association itself or on the submitter of the application; however, many industry organizations are up in arms about the unreasonableness of the current wording of the Certification and the overly broad obligations that it appears to impose.
Community Associations Institute (CAI) has already filed an administrative challenge against the FHA, in part seeking to modify the language of the Certification. Fortunately, HUD officials acknowledged at a recent training conference that they are seriously considering modifying this language in order to reflect more realistic expectations. Unfortunately, for the time being, any individual submitting an application must sign and submit this onerous Certification.
Needless to say, board members and managers should also be very cautious about certifying to compliance with state and local laws and may want to make sure their D&O or E&O insurance coverage is current and that such a certification would be covered under their policy before doing so.
To add to the state of anxiety about the Certification, HUD has further “encouraged” the use of caution by emphasizing the strict penalties that can result from knowingly and willfully using or making a false or fraudulent statement in connection with the FHA application, namely: a fine of up to $1,000,000 and imprisonment for up to 30 years. Overkill or not, this is what we currently have to work with.
Will there likely be any additional significant changes to the application process?
Yes… I recently returned from a training conference in Santa Ana where I spent two full days discussing the gritty details of the FHA approval process with both the national HUD officials who wrote the new FHA guidelines, and the local HUD staff that actually reviews the applications submitted for approval. We discussed recent changes to the application process and the approval/eligibility requirements, as well as additional anticipated changes that are in the works and will be implemented over the coming months and years.
If I learned one thing from the conference, it is that the FHA approval process is still very fluid. The new FHA guidelines are undergoing constant review and revision and will continue to be subject to modification for the foreseeable future.
The details of the application process itself, as well as the actual eligibility requirements for approval, are still being refined, modified, and—in some instances—changed altogether to account for previously unforeseen and unaddressed issues that have arisen. Due to the complexity involved, anyone who is considering submitting an application for FHA approval should be prepared to expend a significant amount of time, effort, and frustration, or be willing to engage the services of someone who understands the intricacies of the approval process and stays abreast of the continual changes to the process.
How can an association obtain FHA approval?
Associations can obtain FHA approval 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, who then reviews and processes the application materials. Fees and approval processing time vary by lender.
The second and most common method is for the association to apply directly to HUD, 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 application process and the headache of dealing with government agencies, many associations choose to hire an experienced attorney to assess their eligibility for approval, review their governing documents for FHA compliance, assemble and review the necessary documentation, and submit the application to HUD.
Obviously, not all condominium associations will meet the eligibility requirements for FHA approval. However, given the current market conditions, nearly all condominium associations should seriously evaluate whether seeking FHA approval would be in the best interest of their community. Most eligible associations will benefit from obtaining FHA approval. Regardless of whether there is currently a potential buyer waiting, approval will 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 seek approval.
When should a condominium association begin the application process?
Due to the length of time involved in the application process and the numerous factors that can delay the process, associations that wish to become FHA compliant should start the application process immediately and be careful to maintain their eligibility.
According to HUD, applications are typically processed and a decision reached within four to six weeks. In my experience, it is often possible to receive an approval within roughly three weeks from the time a complete application is submitted. However, the exact amount of processing time will depend on the current volume of applications received and the current backlog at HUD. Regardless, be aware that the application process will take a significant amount of time and cannot be expedited by HUD (yes, even if there is a sale pending and the only thing holding it up is the receipt of FHA approval).
We can help!
Whether you need someone to handle the entire approval process from start to finish, or whether you just need assistance evaluating your association’s potential eligibility, we can help. In most cases we charge a flat fee, determined up front, for preparing and submitting the application materials and taking care of any necessary follow up with HUD. For those attempting the application process on their own, we are also happy to act in a consulting role on an hourly basis. We have significant experience helping condominium associations evaluate their eligibility for FHA approval, identify and deal with potential barriers to eligibility, and successfully obtain approval. Feel free to contact us with any questions or to get the process started!
503-684-4111, ext. 207