New Stricter FHA Condominium Lending Regulations and Guidelines Sure To Slow Financing And Chill Sales

by Rich Vetstein on October 6, 2009 · 11 comments

in Condominium Law, Fannie Mae, FHA, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

Update: 11/10/09–THESE RULES HAVE CHANGED. Please see my post: FHA Issues Final Revised Guidelines–Spot Approvals Extended Until Feb. 1, 2010

Update: 10/26/09–The FHA Has Delayed Implementation Of New Rules Until December 7, 2009

Under revised guidelines which were to be effective October 1, 2009 but now delayed until November 2, 2009, the Federal Housing Administration (FHA) is implementing a new stricter approval process for condominiums to be eligible for FHA financing. The guidelines are very similar to the new Fannie Mae regulations issued earlier in the year. Some “highlights” of the new regulations include that all FHA approved condominium projects have at least a 50% level of owner occupancy or sell out, no more than a 15% condo fee delinquency rate and a capital reserve study, among other requirements. There is also a little known requirement for an affirmative action housing plan for new construction and conversions. The FHA guidelines will surely slow down condominium mortgage financing, and negatively impact first time home buyers’ ability to obtain FHA mortgages for condominium units.

For those who don’t know, FHA is a government program designed to help more people buy homes, and more borrowers will qualify with FHA financing than with conventional. It is a low down payment (3.5% down) program and the credit standards are much looser. The mortgage rates are typically better, as well.

To obtain a FHA mortgage on a condominium, the project must be FHA approved. Prior to these changes, there were two ways a condominium could be FHA approved: (1) full project approval, and (2) “spot” approval. Full project approval means that FHA has already done the approval on the entire condominium. Spot approvals were performed on non-FHA approved projects on a loan by loan basis, and were a way to make FHA loans available to home buyers in well run condo projects even if they haven’t gone through the full approval process.

No More Spot Approvals

Under the new guidelines, the popular spot approval process will no longer be available and will be replaced with an entirely new process called Direct Endorsement Lender Review and Approval Process (DELRA). FHA claims the DELRA process is more uniform and streamlined that the former spot loan approval process, but that remains to be seen. The good thing is that lenders will retain the ability, like the former spot approval process, to underwrite FHA loans on non-FHA approved projects, albeit with tighter guidelines.

The new regulations also limit the duration of full project approvals to two years. Thus, even approved condominiums must re-certify every 2 years.

New Project Eligibility Guidelines

Under the new project eligibility requirements, all condominiums (consisting of 2 or more units) must meet the following requirements:

  • At least 50% of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 % of the number of presold units (the minimum pre-sale requirement of 50 percent still applies).
  • Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.
  • At least 50% of the total units must be sold prior to endorsement of any mortgage on a unit. Valid pre-sales include an executed sales agreement and evidence that a lender is willing to make the loan.
  • No more than 15% of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
  • No more than 25% of the property’s total floor area in a project can be used for commercial purposes.  The commercial portion of the project must be of a nature that is homogeneous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
  • Reserve Study – a current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. A current reserve study must be no more than 12 months old – if recent events or market conditions have affected the finished condition of the property that information must be included. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed. The regulations fail to define what is “adequate,” however, guidance may be found in the new Fannie Mae/Freddie Mac condominium guidelines which mandate at least 10% of annual operating budget in reserves.
  • No more than 10% of the units may be owned by one investor.  This will apply to developers/builders that subsequently rent vacant and unsold units.  For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100% complete; and only one unit can be conveyed to non-owner occupants.
  • Rights of first refusal are permitted unless they violate discriminatory conduct under the Fair Housing Act.

Buried in the fine print is a requirement for an affirmative action-type housing plan. For both new construction and conversions, if the developer intends to market 5 or more units within the next 12 months with FHA mortgage insurance, an Affirmative Fair Housing Marketing Plan (AFHMP) or a Voluntary Affirmative Marketing Agreement (VAMA) must be in place. An affirmative fair housing marketing plan requires that the racial, socioeconomic, and ethnic composition of the condominium residents closely mirror that of the neighboring area, to the greatest extent possible. Most new condominiums don’t have these in place.

Click here for the new FHA condominium guidelines. You can look to see whether a condominium is approved on the HUD Homes & Communities website located here. Here is the FHA Condominium Mortgage webpage.

The Impact: More Work For Lenders, Condominium Associations/Managers And Attorneys

I expect FHA lenders will approach condominium association boards and managers, asking for certain information, certifications, and even legal opinions regarding compliance with FHA (and Fannie Mae) legal requirements. If a condominium is not on the FHA-approved list, or has lost its approval, condominium associations should consider applying for approval (or re-approval). Reportedly, FHA/HUD is backlogged a month or more in reviewing submitted applications. Thus, should your condominium need to be submitted for approval, keep in mind the process may take some time. Also keep in mind that the work to compile and complete the application package itself can take weeks, and require the board, its manager, and legal counsel to gather data, documents, and expert opinions required for FHA approval. The package of materials that must be submitted can vary from condominium to condominium, and often requires an updated reserve study and certain legal opinions.

Our office is well equipped to assist lenders and buyers with FHA loan compliance issues as we have recently issued opinion letters and certifications under the similar Fannie Mae condominium regulations. Contact for more information.

  • Virginia Harvey

    Are there certain units in an over 55 condo community that can be sold to under 55 ??

  • Angela Goff

    I would like to know if you have a updated list for FHA approved projects (Maryland) regarding condos, co-ops etc., just like Fannie Mae’s loan approval list. This will help in deterimine if a loan would be approved for such property purchasers.

    If a condominium is not on the FHA-approved list, or has lost its approval, condominium associations should consider applying for approval (or re-approval). Is this correct? The HOA company can apply to approve such FHA loans being presented by an borrower for such property.

    Thank you,
    A. Goff

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  • Jutta

    We bought a condo as 2 nd Home for Vacation in 2007 for $120.000. cause everything got so expensive, we cant go to that home as we wanted, so we ask a friend to move in , to do us a Favor and watch more or less that nobody gets in and steal anything, the neigborhood got really bad, cause all the condos that they couldnt sale are rented to low income peoples, well i was reading in the paper that the condo next to us, was saled for only 25.000 from the bank, isnt there a program for us ? even that it is our 2 nd home , but the condo isnt a dime worth anymore thank you

  • Rich- Excellent post, this is information that every potential Homeowner needs to know before they put a home underagreement. Working with a Attorney and Lender that understand these updated guidlines is just as important as working with a Real Estate Agent that is a subject matter expert in your town or city

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  • clint lambert

    Thanks for the post. Currently I have put in an offer for a condo that was accepted and we are mortgaging through the traditional non-FHA methods, however, I was recently told that we will have to delay the closing date by 2 months because the project is awaiting FHA approval.

    I have done some research yet cannot find any literature that supports delays on closing dates for non-FHA buyers. We now have to look at finding short term rental which will cost us.

    Does anyone know of any guidelines, regulations or literature that supports delays to closing dates for non-FHA buyers?

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  • Ronny

    It figures, more obstacles for decent families to overcome. Some families out there like my own are decent and hardworking families who are first time buyers and feel since they have been paying taxes all their life they can get some assistance from the government. But again as usual the “little guy” gets hurt. Now with this guide line not only are we limited to what to look for but since some condos are reasonably lower than private homes we have to wait longer, DAMMIT. No matter what, the average family just can’t win.

  • Thanks for this informative post. Hopefully the FHA will make some changes in this process priuor to November 2. Over time, as more complexes get approved, these changes may be a good thing, since the spot approvals were limited and did not help future borrowers in that complex. Also, I think the rental percentage has been reduced. I think the reserve requirements may a serious obstacle for some small complexes. I took the liberty of linking to your post in my blog

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