FHA & VA CERTIFICATION REQUIREMENTS

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What is the FHA?

The Federal Housing Administration (FHA) is a government-owned insurance company. It does not loan money; it insures loans for buyers who cannot afford a conventional down payment. FHA-insured loans now account for more than half of all new home loans. With an FHA-insured loan, buyers can obtain:

•  low down payments (3.5% of the purchase price vs. 20% for conventional loans),
•  low closing costs,
•  easy credit qualifying, and
•  loans up to $625,500 (up to $765,500 in high-cost areas).

Condo Project Certification

Project certification applies to condominium projects, not planned developments. Certification of the development means the association meets guidelines established by the FHA, which it believes will reduce the risk of default on home loans insured by the FHA during that development. Once the association has been certified, buyers of condominiums in the development can apply for FHA-insured loans. This does not mean that buyers automatically receive FHA-insured loans; they must still qualify as buyers.

Certification Requirements. Following are some requirements (readers should check the FHA website for complete and up-to-date information). Also, new Fannie Mae requirements related to condominium deferred maintenance and safety may impact requirements:

• Single Investor Ownership. For properties with more than 20 units, no single investor, entity, or related party may own more than 10% of the units within the project. For properties with 20 units or less, no individual owner, entity, or related party may own more than one unit.
• Owner Occupancy
  1. 2-4 units: 75% of units must be owner-occupied.
  2. Five or more units: 50% of the units must be owner-occupied.
• Commercial Space must not exceed 35% of the project’s total floor area. Exceptions can be made when the commercial space exceeds 35% but does not exceed 49%. Additional requirements must be satisfied to be granted an exception.
• Property and Flood Insurance. Effective February 7, 2024. Six changes are being implemented to align with FreddieMac Seller Guide – Section 4703.2 – “Minimum Property Insurance Types and Amounts.” 
• Litigation
  1. The project must not be subject to pending litigation in which the project sponsor is a named party related to its safety, structural soundness, habitability, or functional use (construction defect litigation).
  2. The project must not be subject to pending litigation not covered by insurance or litigation exceeding insurance coverage amounts.

Signer Certification. FHA documents require an authorized association representative to certify that (i) to the best of their knowledge and belief, the information and statements contained in the condominium project application are true and correct, and (ii) they have reviewed the condominium project application and it meets all current Federal Housing Administration (FHA) condominium approval requirements; and (iii) they have no knowledge of circumstances or conditions that might hurt the project (including but not limited to defects in construction; substantial operational issues; or litigation, mediation or arbitration issues).

Certification Expiration. Project certifications are good for three years, at which point they expire. Condominium boards should begin the recertification process before expiration to avoid gaps. Recertification can begin up to six months before the expiration date. For more information, see the FHA Mortgagee Condo Approval Guide on their website. Standards vary for associations still under developer control and for condo conversions. To determine if your association has FHA approval, visit the FHA website.

Single Unit Approvals. Individual buyers can also apply for certification if the project is not certified. The following are key elements for approval:

• No more than 10% of units may have an FHA-insured mortgage. The concentration rate can be found on the condo lookup section of HUD.gov.
• The SUA criteria are precisely the same as a Full Project Certification. If the Condominium Project does not qualify for Full Project approval, it will not be eligible for SUA.
• The project must have at least five units.
• The application must be completed each time an applicant requests an SUA within a condominium project that is not FHA-certified. Previous SUA applications cannot be used.

Transient Housing

The FHA will deny certification to condominium associations if they allow short-term or "transient" housing, i.e., rentals for less than thirty (30) days. For those associations with no rental restrictions, there are two solutions:

• Amend their governing documents to remove the offending language, or
• Provide a dated and signed statement on association letterhead that no units in the development are leased for a term of less than 30 days and tenants are not provided services commonly associated with hotels. 

CC&R Amendment. The Davis-Stirling Act provides that rental prohibitions adopted after January 1, 2012 do not apply to existing owners in a development; they only apply to those who acquire property after the prohibition has been adopted. (Civ. Code § 4740.) Because this requirement is so recent, there is no case yet telling us what is an acceptable restriction versus an unacceptable prohibition.

Certification Documents

Before it will ensure loans in a condo development the FHA wants to make sure the association is solvent. As a result, it wants to know about anything that could financially stress borrowers and could cause them to default on their loans.

Lawsuits & Assessments. As part of the certification process, the FHA requires explanations regarding lawsuits involving the association and special assessments.

Financial Status. The FHA wants to make sure the HOA is solvent. To that end, it requires three financial documents:

• Income & Expense Statement. The end of year 'income and expense' statement is reviewed for contributions to the replacement reserve fund. Absent any contributions, FHA looks at "profit" and capital expenditures. FHA wants to see the advancement of capital expenditures or an increase over the year of the replacement reserve balance.
• Budget. The annual operating budget is reviewed for both income and for anticipated contributions to the Replacement Reserve Fund again;
• Balance Sheet. Finally a current balance sheet is reviewed to ascertain the current reserve balance.

Signing the Documents. Some companies that assist with FHA certification will sign Appendix 'A' on behalf of boards certifying that the association is in good standing per local, state and federal law and agreeing to notify the FHA if they become aware of HOA problems.

Onerous Penalties. The risk for an association board seeking FHA certification is the onerous penalties imposed by the federal government if information in the application is inaccurate--up to 30 years in federal prison and fines up to $1 million. The certification process is complicated and certification requirements sometimes impossible to verify. Although the certification language was softened on September 13, 2012, the severe penalties remain. Under the new rules, the association must certify:

• To the best of my knowledge and belief, the information and statements contained in the condominium project application are true and correct; and
• I have reviewed the condominium project application and it meets all current Federal Housing Administration (FHA) condominium approval requirements; and
• I have no knowledge of circumstances or conditions that might have an adverse effect on the project (including but not limited to defects in construction; substantial operations issues; or litigation, mediation or arbitration issues).

No Duty to Certify

Board Approval Not Required. There is no statute requiring boards to certify their condominium project as a whole for FHA insured financing. Certification can be done individually by a homeowner provided, however, a signature by an officer of the association or the manager (or management company) is required on the application to ensure  the information is factual. This is similar to a lender's condominium questionnaire. The board does not need to vote on it unless the association is seeking the certification.

Business Decision. Unless the governing documents provide otherwise, seeking FHA certification for the entire project is discretionary. Following are arguments that often come up when boards debate the issue.

Argument For Certification. FHA insured loans have become a significant percentage of all condominium loans in California. In 2007, they accounted for only 3% of the market. By 2012 they accounted for more than 50% of all new home loans and 80% of first time home buyers. Moreover, loan limits now go to $625,500 (and $765,500 in high-cost areas). As a result, failing to certify the project would eliminate a significant percentage of potential buyers. In addition, older condo owners sometimes rely upon reverse mortgages to remain in their homes and FHA is the best source for affordable reverse mortgages.

Argument Against Certification. Condominium associations might not qualify due to owner-occupancy rates, prohibited terms in governing documents, or similar issues involving the certification process. Some argue that FHA buyers may be financially unstable, because of the low down payment (3.5% of the purchase price vs. 20% for conventional loans). This is countered by arguments that FHA Insured loans are fully vetted by the lender and borrowers are, therefore, stable.  Also, there are conventional loan programs called "Conventional 97" that require only 3% down, so the low down payment argument is not a sound argument for avoiding FHA certification. Another argument against certification is the cost if done by a law firm. However, the certification submittal can be done by companies that specialize in offering this service. Most services charge under $1,000.

Recommendation: Boards can weigh the pros and cons of seeking certification for the entire project. Even if the board decides not to pursue certification for the project as a whole, it should cooperate with any homeowner seeking certification. The association does not need to absorb any costs but simply cooperate in the certification application.

FHA & VA Certification Disclosure Requirements

Condominium Associations. Beginning January 1, 2016, condominium associations must disclose their status as a Federal Housing Administration (FHA) approved and a Department of Veterans Affairs (VA) approved condominium project. This only applies to condominium associations, not planned developments. (Civ. Code § 5300(b)(10)-(11).)

Form of Disclosure. The disclosure must be part of the association's annual budget report to the membership 30 to 90 days before the end of its fiscal year. They must include the following disclosure:

• FHA Statement. Certification by the Federal Housing Administration may provide benefits to members of an association, including an improvement in an owner’s ability to refinance a mortgage or obtain secondary financing and an increase in the pool of potential buyers of the separate interest. "This common interest development [is/is not (circle one)] a condominium project. The association of this common interest development [is/is not (circle one)] certified by the Federal Housing Administration."
• VA Statement. Certification by the federal Department of Veterans Affairs may provide benefits to members of an association, including an improvement in an owner’s ability to refinance a mortgage or obtain secondary financing and an increase in the pool of potential buyers of the separate interest. "This common interest development [is/is not (circle one)] a condominium project. The association of this common interest development [is/is not (circle one)] certified by the federal Department of Veterans Affairs."

Font & Separate Paper. The disclosure statement must be in at least 10-point font on a separate piece of paper. (Civ. Code § 5300(b)(10)-(11).)

Recommendation: To avoid creating potential liability for themselves, associations should add two more sentences to each disclosure. The first should state that information regarding the association's FHA/VA status is as of a particular date. That way, if the association's status changed after the disclosure, a buyer and seller in escrow can't claim they were misled. The second sentence should direct people to check the FHA website and VA website for current information. Condominium associations that wish to become FHA-certified should seek the assistance of companies such as www.FHAreview.com, which specializes in shepherding applications through the FHA. Boards can find them by doing a Google internet search for "Condo FHA certification."

ASSISTANCE. Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.