Condominium managers and boards of directors have a dilemma when it comes to the Federal Housing Administration. On the one hand, they know their unit owners want FHA financing to either refinance their existing mortgage or to help potential buyers secure loans. On the other hand, they recognize that recent FHA guidelines have put unreasonable requirements on condominium associations, including requiring them to certify certain facts, which, if wrong, could result in fines of up to $1 million and up to 30 years in prison.
In the past few years, the FHA has literally become the “main game in town” for condominium loans. The reason is because an FHA-insured loan generally requires a lower down payment than traditional loans in order to go to settlement. The Community Association Institute (CAI) – a national trade association representing condominium issues and communities – estimates that in 2010, between 30 and 40 percent of all condominium mortgages were FHA-insured.
But the FHA – as well as other organizations such as Fannie Mae and Freddie Mac – are mindful of the massive condominium foreclosures in some states, including California, Florida and Nevada. As a result, all agencies – especially the FHA – have tightened their rules to limit their own exposure to mortgages that fall into default.
On June 30, the FHA issued a policy guidance to mortgage lenders as to what requirements must be met in order to allow a loan to be insured by the agency. According to its Web site, the FHA “provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. . . . FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s default. Loans must meet certain requirements established by FHA to qualify for insurance.”
For example, for existing condos more than one year old:
— No more than 50 percent of the total units can have FHA insurance. Under certain circumstances, this percentage can be higher.
— No more than 25 percent of the total floor area in the project (or in a unit) can be used for commercial purposes; however, exceptions can be requested on a case-by-case basis for another 10 percent increase in floor area.
— At least half of the total condo units must be owner-occupied or sold to owners who intend to occupy.
— No more than 15 percent of the total units can be more than 30 days past due on paying their condominium assessments.
Perhaps many associations can meet these requirements. But this is all new. Up until 2009, mortgage lenders were permitted to get “spot approvals.” A spot approval would allow a lender to determine whether the specific condo unit meets the FHA requirement. But since too many associations were having financial trouble — often caused by only a few delinquent owners — spot approvals were discontinued. Now, the entire condominium project must qualify and be approved before any FHA loan can be made to a potential buyer or to a unit owner looking to refinance.
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