These days more and more people are relying on FHA-insured loans to purchase homes. “FHA insured loans” are simply loans provided by FHA-approved lenders and backed by Federal Housing Administration mortgage insurance. They used to comprise less than 10% of residential mortgages and were popular because they allowed buyers with unestablished credit or lower credit scores to qualify for loans with smaller down payments. However, in the post-financial meltdown, stricter lending regulatory environment, FHA-insured mortgages constitute over 50% of today’s residential loans.
One negative feature is that FHA-insured loans require premiums for two types of mortgage insurance: an upfront mortgage insurance premium and an annual mortgage insurance premium (charged monthly).
In order for a prospective buyer to use an FHA insured loan, the property must meet FHA’s requirements. For condominiums, the entire condo project must have FHA certification. If your project is not FHA-certified, you may be limiting the pool of prospective purchasers. Losing sales in this economy could leave you with angry sellers, including sellers who think that not having FHA certification is a breach of the board of directors’ fiduciary duty, which could lead to a lawsuit. Regardless of whether such a lawsuit would have merit, your Associations would likely prefer to avoid that risk.
The first step is determining whether your project is eligible for FHA certification. Here are a few of the key eligibility requirements:
- Project must be primarily residential (excludes hotels, timeshares, live-work projects with more than 25% of the units devoted to “work”)
- Any one investor/entity cannot own more than 10% of the total number of units
- More than 50% of the units must be owner-occupied
- Fewer than 15% of the units can be delinquent in the payment of assessments
- Budget must provide for funding of replacement reserves in an account representing at least 10% of the budget
While the Association generally has little control over the first two requirements, an association can work to come into compliance by adopting rental restrictions, updating budgets and reducing delinquencies through collection actions.
If your Association meets these and the other eligibility requirements listed in the FHA’s Condominium Project Approval and Processing Guide the next step is compiling all of your Association’s governing documents and other documents relating to the Association’s finances, insurance, and reserve studies. You will also be required to disclose any special assessments or litigation and to provide a project certification stating that:
- The information and statements provided are true and correct;
- The Association meets all FHA condominium approval requirements; and
- You have no knowledge of circumstances that might have an adverse effect on the projects (i.e. construction defects, operations issues, litigation, etc.)
All of this information, including the certification, needs to be submitted to FHA for approval. If the certification is rejected, FHA will identify the reasons therefore and an Association may re-apply. FHA certification is valid for two years; Associations have an ongoing obligation to notify FHA/HUD of any significant changes in circumstances that occur while the Association is certified.