The newly introduced FHA condo approval guidelines allow many of the previously ineligible condo projects to gain FHA approval. Due to these recently changed condo eligibility requirements by FHA, it may be the appropriate time for condo associations to consider seeking FHA condo approval. In the following article, I’ll discuss the new changes and their significance, along with a broad overview of the entire FHA condo approval process for all interested parties – condo HOAs, board directors, managers, mortgage professional and new home buyers.
Federal Housing Administration (FHA), a part of the Department of Housing and Urban Development, insures home loans originated by its approved lenders according to the guidelines it sets. FHA home loans are quite popular among new home buyers and existing homeowners to finance their primary residences, especially those without much in terms of down payment. Beginning in June, 2009, HUD, which oversees FHA, has issued a stream of new approval guidelines pertaining to condos that are eligible financing under FHA loan guidelines. Some of the significant guideline and requirement changes are as follows:
- Entire condominium project must have an FHA approval in place for any of the individual units to qualify for FHA financing. Before the introduction of the new changes, FHA used to allow an individual unit to secure spot approval and be eligible for financing under FHA mortgage programs. The current changes completely eliminate this. No longer will individual units in a non-FHA approved condominium be allowed for loan approval.
- FHA condo approval is only valid for the duration of two years. The previous approval issued by FHA for condos has no fixed expiration date. Currently, the newly issued approvals will only be valid for a period of two years, after which they must be recertified in order to maintain their approval status.
- Substantial changes have also been made to the eligibility criteria and documentation requirements.
All the FHA condo approvals issued in the past, before the introduction of the new guidelines have expired. Many condo HOAs are unaware of this and may falsely believe that they a FHA approval. The best way to check the status of their condominium project is to access the FHA site and search for its current approval standing.
What is a FHA Condo Approval and Why is it Important?
To understand the importance of FHA approval for condos, you need to first know about how FHA handles the financing under its loan programs. FHA does not insure loans that fall out of its lending parameters. The lenders who are FHA-approved follow the agency’s guidelines when originating loans.
Due to the FHA insurance coverage, mortgage lenders are able to reduce their risk and offer loan terms highly favorable to the borrowers who otherwise may not qualify for home loans. With as little as 3.5% as down payment, home buyers can finance the purchase a new home. Additionally, the underwriting requirements for an FHA loan are quite easy to satisfy by even borrowers without perfect credit. The closing costs are also quite lower when compared with traditional mortgage loans financed by conventional lenders.
In light of the current economic downturn, more and more home buyers are opting for FHA-backed loans. In the first four years since the market meltdown in 2008, more than one-third of the newly originated mortgage loans are insured under FHA programs. If your condominium project does not get FHA approved, you are significantly reducing the pool of potential buyers for any units offered for sale.
While the importance of the FHA approval cannot be overstated when it comes to their impact on the marketability of a condo, it should also be noted that not all condominium associations will be able to meet the eligibility requirements. As the lending guidelines of most conventional lenders are still tight and disallow most of the new home buyers without a perfect credit, income and asset profile, in addition to a large down payment, any responsible condo board must consider securing an FHA approval if they can do so. It would be in the best interest of existing home owners occupying the condos and also for the potential buyers.
Some of the major benefits of an FHA condo approval are:
- The pool of potential buyers’ increases significantly as a large portion of the residential lending still relies on FHA financing.
- Existing owners will be able to market their properties to a wider pool of buyers. Being “FHA Approved” can also result in a quicker sale of condo units when they are listed for sale.
- The market value of the condos will also see a positive effect. This can have the potential effect of boosting the value in the entire condo community.
- Reduces any future lawsuits or legal issues by owners against the HOA and board members for failing to perform their fiduciary duty.
What requirements must a condominium association meet in order to obtain an FHA approval?
A number of requirements must be met to become an FHA approved condo. Some of the major eligibility guidelines are:
- There should be no recent or current litigation. If the litigation pertains to construction quality or defects, it may be hard to become eligible.
- The HOA must have at least 10% of its annual association budget allocated towards reserves.
- Any current or recent special assessments must be clearly described and explained.
- The percentage of owner-occupied units must not be less than 50% of the total units in the project.
- Proof of sufficient insurance that covers condo board members, employees and managers regarding the performance of their fiduciary duty.
- The number of units that are delinquent on their HOA payments for more than 60 days (2 months) must not be more than 15%.
- The total floor space in a condominium project for commercial purposes should not exceed 25%. The newly assigned guidelines do allow up to 50% of commercial space in some exceptional cases.
- The total number of units owned by a single investor should not exceed 50%.
- The governing guidelines of the HOA must not contain any provisions that are not in line with FHA guidelines. If any such items exist, they must be amended.
The requirements listed above are just a summary of the major FHA condo approval guidelines. A number of additional requirements will also be needed to gain a HUD approval.