Defined. The 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.
FHA Approval. On February 1, 2010, the FHA stopped giving spot approvals and now requires that condominium developments become approved as an entity. FHA certification applies to condominium projects not planned developments. To qualify for an FHA insured loan, condominiums must be in a common interest development that has been "certified" by the FHA. 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 in that development. Once the association has been certified, buyers of condominiums in the development can apply for FHA insured loans. It does not mean buyers automatically receive FHA insured loans, they must still qualify as buyers.
Certification Expiration. FHA certifications are good for two years, at which point they expire. Condominium boards should begin the recertification process before the expiration so as to avoid gaps. Recertification can begin up to six months prior to the expiration date. Unless the governing documents provide otherwise, boards of directors have no statutory duty to seek certification for their associations. However, decisions about recertification should not be based on value judgments about FHA-qualified owners or prospective owners.
Certification Requirements. In November 2009, the FHA issued letters 2009-46A and 2009-46B outlining their certification requirements for condominium associations. The requirements were revised by Mortgagee Letter 2012-18 dated September 13, 2012 and further modified by Mortgagee Letter 2015-27. Following are some of those requirements (readers should check the FHA website for complete and up-to-date information):
- At least 50% of the units must be owner-occupied. There is an exception to this rule, which reduces the required owner occupancy to 35%. A special set of additional guidelines will apply. The exception is only given to existing condo complexes with at least 3 years of very stable finances, and low delinquency rates.
- Reserve contributions must be at least 10% of the budget.
- No more than 15% of the units may be more than 60 days delinquent.
- Must meet new insurance coverage and deductible requirements.
- If in a flood plain, must meet new requirements established by FEMA.
- Generally, no more than 25% of the development's floor space may be commercial. Exceptions allow commercial space up to 50% with additional requirements between 25% and 35% and between 35% and 50%.
- No more than 50% of the owners already have FHA insured loans. There are special exceptions that can be made once that 50% is met.
- Employee dishonesty insurance for those associations over 20 units.
- Condominium projects with with up to 35% commercial space must go through HRAP.
For more detail, see the FHA mortgagee Condo Approval Guide on the their website. Standards vary for associations still under developer control and for condo conversions. To find out if your association has FHA approval, go to the FHA website.
Signer Certification. FHA documents require an authorized association representative to certify that:
- To the best of their knowledge and belief, the information and statements contained in the condominium project application are true and correct; and
- They have reviewed the condominium project application and it meets all current Federal Housing Administration (FHA) condominium approval requirements; and
- They 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 operational issues; or litigation, mediation or arbitration issues).
Loan Repackaging. Once a bank makes FHA-insured loans, it can sell them to Fannie Mae. Non-FHA insured loans can be sold to Freddie Mac.
Annual Budget Disclosure. Condominium associations must disclose annually whether or not the association is FHA/VA certified.
ASSISTANCE. Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.