New FHA Condominium Guidelines Allow for Higher Delinquency Rates

The Federal Housing Administration (FHA) Condominium Project Guidelines were recently revised in various respects. One significant change takes account of the financial difficulties that condominium associations and their owners have been facing over the past several years. The previous guidelines stated that associations would not be approved if more than 15% of units were more than 30 days delinquent. Under the new guidelines, condominium associations that exceed that 15% threshold can still qualify for FHA approval if they:

1) Have no more 20% of units that are more than 30 days delinquent;

2) Provide a report showing the past 6 months of assessments charged and collected;

3) Provide a report showing current reserve fund balances and operating accounts that exceed the amount of outstanding delinquencies;

4) Provide a showing that the association has budgeted for delinquencies;

5) Provide a reserve study less than 24 months old demonstrating that the association can meet replacement needs; and

6) Provide evidence of collection efforts, including legal actions and payment plans.

If your association is interested in obtaining FHA approval, it should contact an experienced professional that works in that area to determine whether it meets the many criteria that are involved in that process.

Interview Spotlights New System to Certify FHA-Approved Condominiums

I am pleased to note that I was recently quoted in an Inman News article written by Steve Bergsman entitled New FHA Condo Financing Rules Squeeze Sellers. This article offers an engaging examination of new re-certification procedures that condominium associations must follow to preserve access to Federal Housing Administration loans. It also highlights the importance of FHA loans in the current real estate market. You can check your condominium's FHA status by searching the U.S. Department of Housing and Urban Development's condominium database.

FHA Condominium Recertification Deadline Has Been Extended

The December 7, 2010 deadline for condominiums that were placed on the FHA approved list before October 1, 2008 to obtain the recertification necessary to allow them to maintain their FHA approved status has just been extended. Here are the new re-certification deadlines:

If approved between 1972 and 1985, deadline is 12/31/10.
If approved between 1986 and 1990, deadline is 5/31/11.
If approved between 1991 and 1995, deadline is 7/31/11.
If approved between 1996 and 2000, deadline is 8/31/11.
If approved between 2001 and 2005, deadline is 9/30/11.
If approved between 2006 and Sept. 2008, deadline is 3/31/12.

Condominiums must meet a number of requirements to qualify for FHA approval. For example, they must be at least 50% owner-occupied, and no more than 15% of their units may be delinquent. Their budgets must fund reserve accounts in an amount equaling at least 10% of those budgets. They must maintain property insurance in an amount equal to 100% of the current replacement cost of the condominium and comprehensive general liability insurance covering the common elements as well.

For more information regarding the FHA recertification process, please refer to my past posts on this subject:

New Requirements for FHA Condominium Loans Delayed and Revised

FHA Loans Will Soon Require Ongoing Approval of Entire Condominium

New Requirements for FHA Condominium Loans Delayed and Revised

The U.S. Department of Housing and Urban Development has announced that most of the new guidelines for Federal Housing Administration (FHA) loans related to condominiums will not be implemented until December 7. The "spot loan" approval process is now scheduled to be eliminated on February 1, 2010. All currently approved condominium projects will be transferred to the new FHA approved list. Projects that were approved before October 1, 2008 will require re-certification by December 7, 2010. Projects that were approved between October 1, 2008 and December 7, 2009 will require re-certification within two years of their approval date.

The new standards governing FHA condominium loans that were first announced in June have also been revised. One significant change is that condominiums are not required to maintain a current reserve study. A "budget review" process has been inserted instead. This review must determine that the budget is adequate and meets the following standards: 1) Includes allocations to ensure sufficient funds are available to maintain amenities and unique features; 2) Provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and 3) Provides adequate funding for insurance coverage and deductibles. If a condominium's budget does not meet these standards, a lender may request to review a reserve study that is less than a year old to assess the project's financial stability.

Another important revision to the new FHA standards concerns the kinds of insurance coverage that must be in place to obtain approval. Condominium associations are required to maintain property insurance in an amount equal to 100% of current replacement cost of the condominium and comprehensive general liability insurance covering common elements, commercial space, and public ways. Associations with 20 or more units must also maintain fidelity insurance with coverage in an amount no less than the sum of three months assessments on all units plus reserve funds. If the project is located on a 100-year flood plain, a certain type of flood insurance is required as well.

If the board of your condominium association is concerned about obtaining or maintaining FHA approval, then it should consider seeking guidance from an attorney or other real estate professional that is familiar with this complex area.

FHA Loans Will Soon Require Ongoing Approval of Entire Condominium

Loans insured by the Federal Housing Administration (FHA) are the best financing option for many prospective condominium buyers. FHA loans have the smallest down payment required in the industry (3.5%) and flexible qualifying standards. The availability of FHA loans makes it easier for condominium owners to sell their units and enhances property values. Unfortunately, ensuring continued access to FHA loans is about to get more complicated.

A condominium unit is currently eligible for FHA financing if the entire condominium is FHA approved or if a unit owner successfully completes a “spot approval” process. Since most condominiums in the Puget Sound area are not FHA approved, the spot approval process has been the only way that most condominium buyers can take advantage of these types of loans. However, the FHA spot approval process is being eliminated on October 1, 2009. Potential buyers of units at most condominiums will soon have no access to FHA loans unless boards take action to secure and maintain FHA approval for their condominiums.

The FHA approval process typically takes a few months to complete. Numerous documents must be produced, and the agency must evaluate eligibility requirements like percentages of delinquent and rental units (must be no more than 15% delinquent and at least 50% owner-occupied) and the age of the association’s reserve study (must be no more than 12 months old). Attorneys, property managers, and other real estate professionals can help condominium associations understand whether they can obtain FHA approval and how to apply if they are eligible.

Compliance with Fannie Mae and FHA Condominium Lending Standards

Mortgage giant Fannie Mae and the Federal Housing Administration (FHA) are major sources of money for individuals seeking to purchase or refinance condominium units. If a condominium association does not meet their lending standards, owners will find it more difficult to sell and refinance their units, which may have an adverse impact on the value of all units. Condominium boards should therefore take several key lending standards into account as they manage their associations' affairs.

The number of condominium units that are occupied by their owners is one important standard. The FHA requires that at least 51% of the units be owner-occupied before it will approve a loan. Some mortgage insurers will reject applications if less than 70% of the units are owner-occupied. Boards should take these restrictions into account when evaluating the number of rentals in their associations and whether to amend their declarations to restrict the number of units that may be rented.

The number of condominium units that are delinquent in the payment of monthly assessments is a second important standard. Fannie Mae requires that no more than 15% of the units may be 30 days or more past due. Fannie Mae has recently clarified that it will work with lenders who request waivers when a particular project exceeds this 15% threshold, and that exceptions are typically granted if the project can sustain itself with 15% or more of the units delinquent. However, there is no guarantee that lenders will request such exceptions or that they will be granted, and high delinquency rates will at a minimum make obtaining a loan more complex. Boards should take this restriction into account when evaluating their collection policies and how to deal with delinquent owners.

The amount of funds set aside for maintenance of the condominium is a third important standard. Fannie Mae requires that at least 10% of the association's operating budget be reserved for "capital expenditures and deferred maintenance". Boards should take this restriction into account when evaluating their associations' budgets.

Bringing a condominium association into compliance with these lending standards will promote both the short-term financial health of the association and the long-term financial health of all unit owners. It may not be an easy goal to accomplish, but the potential benefits make it worth the effort.