Wednesday, November 25, 2009

What do you need to know about the new FHA condominium mortgage approval process?

The Federal Housing Administration (FHA) has a new loan approval process for condominium projects pursuant to the Housing and Economic Recovery Act of 2008 (HERA).

The FHA has revisited its earlier proposals in this regard after meeting with considerable public backlash. While the transitional and successor criteria issued by the FHA on Friday, November 6th, still make it much more difficult to obtain FHA-backed financing for condominiums, they are more positive than the FHA's first attempts in this area several months ago.

The latest proposal, Mortgagee Letter 2009-46 B, includes the following requirements for those wishing to obtain FHA financing for condominium purchases:

1. The condominium must be covered by hazard and liability insurance and when applicable, flood and, in condominiums with 20 or more units, fidelity bonding/insurance on ALL officers, directors and employees of the association and all other persons handling or responsible for association funds. The fidelity coverage must be no less than a sum equal to 3 months aggregate assessments on ALL units plus reserve funds;

2. A right of first refusal for the association IS permitted unless it is exercised discriminatorily;

3. No more than 25% of the condominium's total floor area can be used for commercial purposes;

4. No more than 10% of the units can be owned by one investor. This limitation also applies to developers/builders that subsequently rent vacant and unsold units. For condominiums with 10 or fewer units, no single entity may own more than one unit. In order to be eligible for FHA financing, all units, common elements and facilities within the condominium must be 100% complete;

5. No more than 15% of the total units can be more than 30 days past due in their payment of assessments;

6. At least 50% of the units must be owner-occupied or sold to owners who intend to occupy the units; and

7. Lenders must review the association's budget to determine if it is adequate. In cases where the budget documents do not meet the FHA's standards, the lender may request a reserve study (which cannot be more than 12 months old) to assess the financial stability of the condominium.

These are only a few of the new guidelines that FHA-approved lenders must follow to determine the eligibility of a particular condominium for financing. What does this mean for you and your community? It means the pendulum has swung very far in the other direction and it is now much more difficult for potential purchasers to qualify for the financing needed to purchase units and homes. At a time when some owners are looking to move out of communities because they cannot afford to keep paying the shortfall created by non-paying owners, their pool of eligible purchasers just got smaller. For communities praying for new owners to move in and start paying assessments, they too just took a hit.

Let's hope that the FHA further relaxes these guidelines in the coming months.

Wishing you all a very Happy Thanksgiving!

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