FHA Condo Approval

Recent changes to the HUD regulations went into effect on February 1st 2010 that associations should be aware of. These changes impact the re-financing and purchasing of units in condominium and townhome associations. If your association does not act to ensure compliance with these regulations, selling or refinancing units will become difficult. Due to these changes condominium units can only be purchased using an FHA insured loan if the condominium association has been FHA certified. Spot-approvals, as detailed further below, are no longer allowed. Since FHA insured loans represent such a large portion of the buying population, condos for sale in non-FHA-certified associations will be extremely difficult to sell.

FHA Condo Approved List

Let's address the most common question asked by condominium owners: Is my condominium association FHA certified?

The HUD website attempts to provide a mechanism to determine if your association is certified. Unfortunately, the search is not perfectly functional and the results can be less-than-assuring. That being said, you can perform a search here.

How did these changes come into effect?

Late last year, the Federal Department of Housing and Urban Development (HUD) passed new regulations dictating terms under which the Federal Housing Authority (FHA) will be able to offer mortgage insurance on multi-family dwellings. An informative overview of these changes can be found at the CAI website.

In order for a buyer of a condominium unit to purchase using an FHA insured loan, HUD now requires that the condominium association be FHA-certified or "pre-approved.”  Due to the fact that obtaining this certification requires fulfilling an extensive list of requirements, only a small percentage of associations in the United States (roughly 50,000) have obtained this status. Prior to the new regulations, there was little incentive for a condominium association to obtain the certification since HUD allowed "spot approvals" by which a buyer could purchase a condominium in a non-FHA-certified association by filling out a few documents and obtaining an exception. If the association met certain criteria, the "spot approval" would suffice and the buyer could purchase with an FHA loan.

The New Regulations

Effective February 1st, 2010, spot approvals are no longer allowed to be used as a mechanism to bypass the FHA’s certification process. Now, the only way for a buyer to purchase a condominium with an FHA-insured loan is if the property has been FHA-certified. A certification is valid for two years. This means that all associations will repeat the certification process every other year to remain FHA-approved.

The Impact

Due to the mortgage crisis, many estimate that the FHA's total market share may rise to 70-90% of all sales by the end of 2010. Stated differently, if a condominium association is not FHA-certified, 70-90% of the potential buyers in the market will be unable to purchase a unit in the association. Removing such a large portion of the potential buyers from the market will have a severe impact to any seller in a non-certified association.

Another concern is HUD's ability to handle the impending influx of certification requests. There are only four HUD offices in the country handling applications.  In recent months, volume has skyrocketed from an average of 400 applications pending to over 8,000 applications. Wait time for approvals is currently about two months and rising.  There are hundreds of thousands of additional applications that will need to be filed this year; how HUD handles the potential gridlock of course remains to be seen. Associations that delay in applying for FHA approval may see their owners struggle to successfully sell their unit.

Action to Take

While it is technically possible for an association to apply for certification directly, it’s not recommended, as navigating the process requires a certain depth of knowledge. The legal firm of Kovitz Shifrin & Nesbit wrote the following: "This [direct application for certification] involves submittal of documents and certifications in compliance with HUD regulations.  We believe associations will be unlikely to be successful utilizing this process.  When we spoke with a HUD representative about this method, their response was ‘Well, you can submit it yourself, but we're not really set up for that.’ Not exactly a ringing endorsement."

It is critical to note that if an association's application is rejected by HUD, the association is blocked from reapplying for a minimum of one year. We recommend retaining a third party to handle the process for you.  Connected Management has partnerships in place for our association clients to become approved as soon as possible before delays become interminable. For self-managed associations a thorough online search should produce firms available to assist in the certification process.

HUD requirements for FHA certification (partial list)

1) At least 50% of units must be owner occupied
2) No more than 15% of units can be delinquent (Delinquent = more than 30 days past due)
3) No more than 10% of units can be owned by one investor. This includes a developer that may rent out vacant or unsold units.
4) No more than 25% of floor area can be commercial space.
5) Right of first refusal may be in the bylaws, but cannot violate Fair Housing Act.
6) A full budget review will take place. One important budget criteria is that it must show at least 10% of budget income is applied towards reserves. ** Many association's budgets do not meet this criteria.

Maximum number of FHA insured loans in an association

After an association is FHA-certified, there are still limits on the number of units that can be mortgaged by an FHA insured loan. Here are the current limits:

Prior to Jan 1, 2011 - Concentration has been increased to 50% of units. FHA will "consider" increasing to 100% if certain criteria are met.

After Jan 1, 2011 -  No more than 30% of units can have FHA insured loans. (For 3-unit condominiums only 1 unit can have an FHA insured loan.)