New FHA Loan Requirements for Condo Sales
Over the last few years, FHA loan policies have been different for condominiums. Recent changes in the way the Federal Housing Administration approves home loans for condominiums have left many would-be homeowners out in the cold, at least temporarily. That’s because the FHA will no longer approve a mortgage for a unit in a community that does not comply with new, stringent standards that went into effect on February 1st. In order to be certified as a compliant community, the condo association must apply to the FHA become certified as meeting all the standards. An FHA mortgage lender can also apply on the condominium community’s behalf to get this certification. The FHA doesn’t make loans itself, but it does ensure home loans made to people with small down payments or less than perfect credit. This is why among first-time buyers, FHA mortgage loans are often the only option for buying a home.
Lemar Wooley, an FHA spokesman, said the new regulations were put into place because Congress changed the law, allowing FHA guidelines to make approvals of loans to condominium buyers more similar to single-family home-loan approvals. “The “Housing and Economic Recovery Act of 2008′ (HERA), moved the condominium authority from Section 234 to Section 203 to allow for more flexible condominium policy guidance,” Wooley said. “”Because of this change in law, the Federal Housing Administration (FHA) is implementing a new approval process for condominium projects and insurance requirements for mortgages on individual units, as authorized under Section 203(b) of the National Housing Act.”Wooley explained that Section 234 was a special section dealing specifically with condominiums. Section 203 provides general guidance for single-family homes.
Announced in November, the new regulations fall into three broad categories, according to Orest Tomaselli, the president of National Condo Advisors, a consulting company that works with condominium associations to help them meet the regulations. First, he said, the community must demonstrate it has a budget reserve that is equal to 10 % of its annual budget. The reserve exists for repairs and maintenance of the common property and plant – the sidewalks, roofing, siding, windows, swimming pool, tennis courts, clubhouse or other facilities. If a community does not have or want such a large reserve, Tomaselli said it can hire an engineer to study the community’s needs and recommend a lower amount. If the FHA accepts the engineer’s study, a lower reserve amount can be set for that community
Second, the condominium community must meet new flood-plain requirements set forth by the Federal Emergency Management Agency. If the community is not in a flood plain, this is not an issue. However, when FEMA redrew its flood maps recently, it expanded the areas it believes will flood. Within those areas, buildings can still comply if the community has flood insurance and the highest living space is 10 feet or more above the flood plain. Or, the community can hire an engineer to file a “Letter of Loan Amendment,’ which, in effect, demonstrates that the FEMA guidance needs adjusting in their case. If FHA accepts this amendment, the community can be certified.
Third, the community must meet certain ownership requirements. At least half of all the units in the community must be owner-occupied, and no one investor can own more than 10 % of all the units. In the case of a community that is still being built, a certain %age of units must be presold. Tomaselli said that the requirements aren’t really bad. Having sufficient capital reserves to meet maintenance needs is wise. Having most of the units occupied by the owners also ensures that the community will be well looked after. And flooding in some areas has been more frequent in recent years. But that doesn’t change the fact that these regulations have hit hardest those with the least ability to pay for engineering studies or increased budget reserves.
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