NO Duty to Certify
Adams Stirling PLC


Business Decision. There is no statute requiring boards to certify their condominium associations for FHA insured financing. Unless the governing documents provide otherwise, doing so is a business decision for boards to make. Following are the arguments that often come up when boards debate the issue.
Argument For Certification. FHA insured loans have become a significant percentage of all condo 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. As a result, failing to certify 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. The cost to become FHA compliant may be significant or unachievable. Condominium associations may not qualify due to owner-occupancy rates, prohibited terms in governing documents, or similar issues involving the certification process. The value of condominiums in the association may far exceed FHA limits, limiting the value of certification. As a secondary issue, some argue that FHA buyers may be financially unstable, i.e., FHA-insured buyers have a low down payment (3.5% of the purchase price vs. 20% for conventional loans), low closing costs and easy credit qualifications, which is why the loan must be insured by the federal government. Because FHA buyers may be financially weaker, they could be less able to handle special assessments and dues increases. As a result, they may become delinquent and slide into foreclosure.
Management Companies. Management companies are agents of the board. As such, it is not their decision whether the association seeks or cooperates with FHA certification--it is the board's decision.

Recommendation: In consultation with legal counsel, boards should weigh the pros and cons of project certification and make a decision whether certification is beneficial or even achievable. Any decision not to seek certification must be based on non-discriminatory reasons. The matter should be put on the board's meeting agenda and discussed in open session. The board's decision and the rationale behind it should then be recorded in the meeting minutes.

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Adams Stirling PLC