FHA condominium rules

FHA Softens Condominium Lending Guidelines, But Barriers Remain

by Rich Vetstein on September 13, 2012

in Condominium Law, FHA, HUD, Massachusetts Real Estate Law, Mortgages

Condo Sales May Get Slight Boost, But Financing Rules Remain Tight

Responding to lender, condominium association and consumer outcry that the existing FHA condominium lending guidelines are too strict, the Federal Home Administration (FHA) on September 13, 2012 announced a round of changes which will hopefully make it easier for borrowers to qualify for FHA condo loans. The full FHA announcement can be found here.

While some of the changes are a step in the right direction, I think overall they are a mixed bag, as FHA left some of the most onerous provisions intact. I’m skeptical that these new changes will have a major impact on condominium sales, but of course, any loosening of the strict requirements is a good thing.

Condo Fee Delinquency Rule Increased to 60 Days Overdue
FHA is softening its stance on delinquent monthly condo fees and home owner association (HOA) dues. FHA is now allowing up to 15% of a project’s units to be 60-days delinquent on condo fees, up from just 30 days delinquent under the prior rule. This change acknowledges the depressed economy which has caused many condo unit owners to have trouble paying their condo fees. This is definitely a good change.

Expanded Investor Purchasing Allowed
Under the new rules, investors can come in and buy more units in a project than they could previously. They can now buy up to 50% of the project units, up from just 10% before, but with an important caveat:  the developer must convey at least 50% of the units to individual owners or be under contract as owner-occupied.

Owner Occupancy Limits and Total FHA Financing Percentage Unchanged
The biggest disappointment of the new rules is that the main impediment to FHA condo financing remains unchanged, and that’s the 50% rule. Before any new buyer can obtain FHA financing, 50% of a project’s units be sold to third party buyers. This is what I’ve called the Catch-22. FHA provides the most first time home financing, so how can a developer expect to sell out his project if he cannot offer initial FHA financing? Doesn’t make any sense. I agree with the National Association of Realtors and the Community Association Institute on this one. Get rid of the 50% rule or decrease it to 25% or less.

Another restriction that hasn’t changed is the number of units that can have an FHA-backed loan. Only half the units can have FHA financing, so a borrower can’t get FHA approval if his unit would put the number of FHA financed units over 50%. That limitation remains unchanged, and that’s a killer for a lot of projects.

Spot Approvals Remain Dead
Mortgage lenders used to love FHA “spot approvals” which could by-pass the involved standard FHA approval process in order to get individual unit financing. Problem was is that they love spot approvals way too much, and they got abused. Ah, a few bad apples ruin it for everyone. FHA did not resurrect spot approvals from the dead on this go-around. Maybe they will be back when the economy gets better.

More Commercial Space OK
Projects can also have more space devoted to non-residential commercial uses than before. You see this a now in Boston with Starbucks and a bank office on the ground floor of a new condominium building. Up to this point, only 25% of project space could be used for commercial purpose. Now 50% of the project can be commercial, although certain authority for approval is reserved for the local FHA office. This will benefit the newer mixed use projects in urban markets.

Fidelity Insurance Coverage Required

Important for all condominium professional management companies. If the condominium engages the services of a management company, the company must obtain its own fidelity coverage meeting the FHA association coverage requirements or the association’s policy must name the management company as an insured, or the association’s policy must include an endorsement stating that management company employees subject to the direction and control of the association are covered by the policy. This is a substantial change to the previous requirements that required management companies to obtain separate fidelity insurance for each condominium.

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Richard D. Vetstein, Esq. is an experienced Massachusetts condominium attorney who regularly advises condominium associations on FHA certification issues. Please contact Mr. Vetstein at [email protected].


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FHA Condominium Lending Rules Go Into Effect Today: Today’s Hurt Is Tomorrow’s Gain

by Rich Vetstein on December 7, 2009

in Condominium Law, FHA, Massachusetts Real Estate Law

Today, the controversial Federal Housing Administration (FHA) condominium mortgage rules go into effect. I’ve written about them extensively on this blog here. The new FHA rules, in summary, require that condominiums undergo a much more rigorous financial review prior to being accepted into FHA mortgage programs.  Sort of like a cardiac stress test for condominiums.

I was interviewed this morning by Associated Press real estate reporter Alan Zibel about the impact of the changes. I said that despite the short term hurt on lenders and the extensive underwriting required, I believe they are a good thing for consumers and condominium buyers because they require condominiums to get their financial collective acts together.  Mr. Zibel graciously quoted me in the article:

While the rules could be tough for builders, they will protect consumers because lenders will be forced to be more careful about which projects they fund, said Richard Vetstein, a real estate lawyer in Framingham, Mass. “On the whole, it’s a good thing,” he said. “Financially sound condominiums make better investments.”

Here’s a direct link to the AP story as reprinted in the Los Angeles Times.

The AP article also touched on the difficulty new condominium developers face with the tougher rules. A Utah condo developer, who shelved a 300 unit project in favor of free standing homes, characterized the new rules as a “debacle.” But the FHA already watered down the new rules from those previously proposed, so builders could be dealing with far worse. On the whole, I think the rules are fair, balanced, and unfortunately necessary in light of the condominium meltdown in states such as Florida and California.

Today’s hurt is tomorrow’s gain….

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