Is Your Condo (Now) Eligible?
Is Your Condo (Now) Eligible?
January 4th, 2013
Recent changes to FHA guidelines have opened the door to FHA approval for many condominium projects that were previously ineligible. In light of these changes, now is an excellent time for condominium associations to evaluate (or re-evaluate) their eligibility and consider applying for FHA approval. This article will discuss the significance of the recent changes, as well as give a broad overview of key issues regarding FHA approval of which board members, managers, and industry professionals need to be aware. If you are already familiar with the basics of FHA approval and prefer to skip directly to the discussion of the most recent changes, effective September 13, 2012, see Section IV below.
I. 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 agovernment 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). Since June of 2009, HUD has published a series of new guidelines that have dramatically changed the FHA approval process for condominiums. The most significant changes were as follows:
1. 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.
2. Condominium project approval now expires every two years. In the past, once a condominium project received FHA approval, the approval had no fixed expiration date. Under the new guidelines, approved projects must apply for recertification every two years.
3. The details (of the application process itself, the 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 now expired; however, many condominium owners and boards are unaware that their project’s approval has lapsed. You can check the following website to verify whether your condominium is FHA approved, and, if so, when the current approval will expire: https://entp.hud.gov/idapp/html/condlook.cfm.
II. 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) does not issue individual loans to borrowers. Rather, FHA agrees to insure certain loans, which—in turn—allows the lender to offer a better deal to borrowers. Because the loan is insured by FHA, 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 10-25% down for most conventional loans), less strict credit qualification criteria, and often lower closing costs.
In light of the still-lingering economic and housing downturn, FHA-backed financing offers an attractive alternative to potential homebuyers. Over the last three years, more than one-third of new home loans have been FHA loans. (Federal Financial Institutions Examination Council press release, September 18, 2012.) 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.
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, or at least evaluate, approval.
III. What factors might prevent ac ondominium association from obtaining approval?
In order to be eligible for FHA approval, condominium associations must meet numerous criteria. A few of the major eligibility factors that will be considered include the following (the factors marked with “*” include recent changes, which are discussed in Section IV below):
1. Pending or recent litigation– will often prevent eligibility, particularly if involving construction defects.
2. Pending or recent special assessments – not an automatic disqualifier, but a major red-flag that must be disclosed and adequately explained.
3. Adequate budget and reserve funding– typically, at least 10% of the association’s annual budget must be allocated to reserves.
4. Owner-occupancy ratio– at least 50% of units must be owner-occupied.
5. Adequate insurance coverage– in particular, many associations have insufficient employee dishonesty or fidelity insurance coverage.
6. *Delinquent assessments– no more than 15% of units may be more than 60 days past-due.
7. *Commercial use – no more than 25% of the total floor area of a project may be used for commercial purposes (*new exceptions allow up to 50% commercial in some cases).
8. *Investor ownership –no more than 50% of units may be owned by any single investor.
9. Governing documents– any provisions which violate FHA guidelines must be amended (i.e. certain types of rental restrictions, transfer fees, and restrictions on conveyance).
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 must also be evaluated. Feel free to contact us if you have specific questions relating to the potential eligibility of an individual project.
IV. What recent changes should I be aware of?
On June 30, 2011, FHA issued revised lending guidelines which made significant changes to the FHA approval process. The 2011 guidance came in the form a new FHA Condominium Project Approval and Processing Guide (the Guide), a 95 page document that completely replaced all prior guidelines.
Although the intent of the Guide was to clarify and consolidate the complex details and requirements of the approval process, the process is, in reality, no simpler or easier to understand than before. The Guide did help to clarify a few previously ambiguous eligibility requirements; however, it also introduced or perpetuated a number of controversial requirements, including a burdensome Project Certification that must be signed and submitted with every FHA approval application. The Guide is still the current “official” guidance, but was recently modified in few significant areas.
In response to concerns voiced by Community Associations Institute (CAI) and other industry groups, the FHA, on September 13, 2012, released a long-awaited revision of its guidelines. Several of the key revisions will significantly increase the number of condominium projects that are currently eligible for FHA approval. The key revisions are as follows:
1. Less Stringent Delinquency Requirements – No more than 15% of units may be more than 60 days delinquent. Previously, the guidelines used a 30 day delinquency threshold, which was unrealistically strict and prevented many otherwise eligible projects from obtaining approval.
2. Relaxed Commercial Space Limitations– FHA will now consider condominium projects with commercial space of up to 35% of the project’s total square footage. Additionally, on a case-by-case basis, FHA may grant exceptions for mixed-use projects with commercial space of up to 50% (but requires substantial additional documentation for consideration).
3. Relaxed Investor Owner Limitations– Previously, projects were ineligible if a single investor owned more than 10% of the total units. Now, a single investor may own up to 50% of units. This should have a dramatic impact on the eligibility of smaller projects and projects with a large number of investor-owned units.
4. Employee Dishonesty Insurance– Certain changes were made to clarify and simplify FHA’s employee dishonesty (fidelity) insurance requirements for projects with professional management companies.
5. Revised Project Certification– Some of the more burdensome aspects of the required Project Certification were eliminated, including 1) the continuing obligation of the application submitter to inform FHA of future changes affecting the project’s eligibility, and 2) the requirement to certify that the project complies with all state and local condominium laws. However, the application submitter must still certify that the project meets all current FHA guidelines. Additionally, strict civil and even criminal penalties may result from false or fraudulent statements made in connection with the application and Project Certification. Given the complexity of the guidelines, the frequency of changes to the guidelines, and to limit any potential liability, we still advise board members and managers to hire an experienced attorney to handle the application process.
V.Will there likely be any additional significant changes to the application process?
Yes. The one thing that is clear about the FHA approval process is that the guidelines are still fluid and evolving. The guidelines are undergoing constant review and revision and will continue to be subject to modification for the foreseeable future.
One significant change anticipated in the relatively near future is a streamlining of the recertification process. Currently, the process of applying for recertification is nearly identical to the full initial application process. However, FHA is expected to revise and simplify the recertification process for projects that have already been approved once under the new guidelines.
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—drastically changed to account for previously unforeseen and unaddressed issues that arise. Due to the frequency of revisions to the guidelines, and the application reviewers’ differing interpretations of the guidelines, anyone who is considering submitting an application for FHA approval should be prepared to either 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.
VI. 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 the association to apply directly to HUD. This process is called the HUD Review and Approval Process, or HRAP. Under HRAP, approvals are typically processed within three to six weeks, if the applicationis 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.
Many associations choose to hire an experienced attorney to assist with the process, due to the complexity of the application process, the frequent changes to the guidelines, and the headache of dealing with government agencies The attorney can assess the association’s eligibility for approval, identify and resolve likely concerns ahead of time, assemble and review the necessary documentation, certify to compliance with FHA guidelines, submit the application to HUD, and take care of the necessary follow-up with HUD.
VII. 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. Though the processing and decision regarding the application is reached within three to six weeks, be aware that the whole application process will take a significant amount of time and cannot be expedited by HUD (even if there is a sale pending and the only thing holding it up is the receipt of FHA approval).
VIII. We can help!
Whether you need someone to handle the entire approval process from start to finish, or whether you just need assistance evaluating an 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!
Matt McMullin, Attorney at Law