Good News For First Time Condo Buyers
FHA loan programs offer low down payment mortgages which are often ideal for first time home buyers who lack cash for a 20% down payment but are otherwise strong borrowers. On June 30, 2011, FHA confirmed its commitment to financing condominiums with the issuance of revised lending guidelines (HUD Mortgagee Letter 11-22). The new FHA Condominium Project Approval and Processing Guide can be downloaded here.
“Today, we institute revised guidelines that preserve FHA’s role in the condo marketplace during these difficult times while making certain we manage risk in a responsible way,” said FHA’s Acting Commissioner Robert Ryan. “This guidance formalizes and expands the policies we put in place in 2009 and lays the groundwork for a more formal rulemaking process going forward.”
Highlights Of New Guidelines
1. Reserve Study Requirements:
New guidelines require reserve studies on all conversion (i.e., new) developments. Reserve Studies are valid for a period of 2 years.
2. Reserve Funding
In addition to a reserve study determination, a minimum of 10% of the operating budget must be set aside as a baseline in a reserve account. Funds to cover the total cost of any item in the Reserve Study or that will require replacement within 5 years must be deposited in HOA’s reserve account. The insurance deductible must also be included in the reserve fund.
3. Delinquent Condo Fees
On existing projects, the condominium cannot have more than a 15% delinquency rate on unpaid condo fees. This could be a problem for struggling condominiums. A waiver may be granted, however, with supporting documentation.
4. Pending Litigation
Litigation impacting the financing soundness of the condominium must be disclosed and explained to FHA. Again, this could be problematic if the condominium is involved in, for example, a lawsuit with the original developer over construction defects.
5. HO-6 Policies
Individual HO-6 insurance policies are required if the master condo insurance policy does not provide interior unit coverage (which most don’t).
6. Fidelity Bonds For Large Projects
Fidelity insurance to protect against employee dishonesty is required for projects over 20 units.
7. New Construction Pre-Sale
New Construction pre-sale requirements remain at 30%, although only for one year after the first closing. After the first year, it increases to 50% for the development.
8. Maximum Commercial Concentration
Remains at 25%, however, new guidance allows for possible waiver request up to 35% of the development.
9. 10% Investor Concentration
No longer includes sponsor unsold units or units required to be rented by State or Municipality, ie; rent stabilized/rent controlled.