The Federal Housing Administration has released its most recent revisions to the guidelines for condominiums seeking approval for FHA-backed mortgage loans. FHA approval is crucial to marketability for condos, since 30 to 50 percent of condo purchases are made with FHA-backed mortgages. The revisions go into effect immediately and will expire August 31, 2014. With this new release, the FHA has revamped controversial rules that have caused thousands of buildings across the country to lose their eligibility for FHA financing. This is encouraging news for condominium unit owners, sellers, and buyers alike.
The revised guidelines should make it easier for large numbers of condo associations to seek certification by FHA. The agency’s previous rules were criticized as heavy handed, costly, and not in touch with the economic realities of condominiums in some parts of the country. For example, the rules prohibited FHA insurance of units in buildings where more than 25 percent of the total floor space was used for commercial or nonresidential purposes. Yet many condominiums in urban areas suddenly found themselves ineligible for FHA financing for residents because they had lower floors devoted to retail stores and offices. For example, when an investor seeking FHA financing last August tried to buy a condominium unit in Telluride, Colorado, the transaction fell through due to too much space in the project being devoted to nonresidential commercial use. Thankfully, the revised rules allow exceptions for up to 35 percent commercial use and provide for additional case-by-case exceptions to 50 percent or higher.
While some of the revisions will affect only a few condo projects, the revisions that will have the most wide-reaching effect include:
Delinquencies: No more than 15 percent of the condo units may be more than 60 days delinquent in payment of condo association assessments. The previous guidelines used 30 days as the threshold.
Fidelity bonds or insurance: All condos consisting of 20 units or more must obtain “employee dishonesty insurance.” The policy must cover all officers, directors, and employees of the association or others handling association funds, and must be in an amount at least equal to three months’ of assessment income, plus the reserve funds. If the association employs a management company, either the management company must have its own bond or insurance, or the association must obtain a separate policy or an endorsement to its existing policy covering the management company and its employees who handle the association’s funds. The previous guidelines mandated separate coverage for the management company, which would essentially require double coverage for professionally managed condominiums.
Eased paperwork: FHA has eased the onerous burdens on the person submitting the certification forms, allowing this person to state that the information on the application is correct to the best of his knowledge; that the condo project complies with all state and local laws; and that the applicant has no knowledge of any factors that could adversely affect the condominium (such as construction defects, pending litigation, or environmental contamination). The previous guidelines required the person submitting the application essentially to guarantee the accuracy and truthfulness of the statements contained in the application – at the risk of huge fines or imprisonment for submitting an application with incorrect or missing information. The FHA has reserved the right to change any of the guidelines at any time if it determines that market factors have put the federal mortgage insurance fund at risk. In addition to the liberalized condo-to-commercial ratio, the agency is allowing single investors to buy up to half the units in a project, up from 10 percent previously. That move is as likely to help suburban and urban markets as resort areas.
In conclusion, these revisions were made in response to criticism of last year’s revisions, which were implemented largely without public input, were widely viewed as being burdensome, and made it virtually impossible for many condominiums to qualify for these important federally backed mortgages.