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 Update - Many Condominiums Will Lose Approved Status Next Month

The Department of Housing and Urban Development (HUD) recently postponed the effective date of its new requirements for Federal Housing Association (FHA) condominium loans until November 2. According to a number of real estate professionals, HUD has also clarified that only condominiums that were placed on the FHA approved list on or after October 1, 2008 will remain on that list on November 2. Condominiums that were placed on the FHA approved list before October 1, 2008 will lose their FHA approved status on November 2, and they must reapply under the new requirements to get it back.

Some (perhaps most) of the Washington condominiums currently on the FHA approved list will unfortunately not be able to meet the new standards. The requirement that no more than 15% of the unit owners can be more than 30 days delinquent will make a large number of condominiums ineligible. The requirement to have a current reserve study, update it annually, and fund at least 60% of the amount specified in the most recent reserve study will keep many condominiums from qualifying. The requirement that at least 50% of the units must be occupied by their owners will further limit the number of condominiums approved.

Once HUD’s new requirements take effect, all condominiums’ initial FHA approvals will expire after two years. Condominiums must then complete a re-certification process every two years to maintain their FHA approvals. This process often involves a large investment of time to collect information and produce documents. Boards will have to weigh the desirability of FHA loans against the cost of preserving access to them.

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.