How do you add value by getting FHA condo approval for your community?
The Federal Housing Administration will insure mortgage loans by lenders that make a loan for the purchase of a residential condo, if the unit is in an FHA-approved condominium community. Considering FHA insured loans account for almost 25% of all home mortgage loans made nationwide, it follows that a unit in an FHA-approved community will appeal to a larger pool of potential buyers. Increasing the universe of potential buyers for a condo community’s units is a decent motivation for an association to obtain FHA approval of their community.
Also, there are buyers out there shopping for a condo who will consider only a community with FHA approval even if an FHA-backed loan is not essential to their purchase. That buyer’s strategy is to use FHA approval as a sort of litmus test for whether the condo has basic desirable characteristics.
FHA condo approval requirements
Not every condo community qualifies for FHA approval. Some communities don’t bother to apply for FHA approval. If your condominium community is not FHA approved, here is a brief summary of the primary requirements it will need to meet to gain FHA approval:
- At least 50% of the units must be owner occupied, except if the community meets other specified conditions, FHA may be willing to lower this standard to as low as 35% owner occupied. “Owner occupied” means the owner occupies the unit as his/her primary residence or as a secondary residence.
- The condo association must maintain blanket property insurance covering 100% of the current replacement cost of the condominium, and comprehensive general liability insurance on the common elements. If the community has more than 20 units, it must also carry employee dishonesty coverage. If the property is located in a 100-year flood plain, the association also needs to carry flood insurance.
- No more than 15% of all units regardless of who owns any unit can be in arrears (more than 60 days past due) in paying their condominium assessments.
- No more than 25% of the project’s total floor area may used for non-residential/commercial purposes, although, an exception is available allowing up to 50% commercial purpose area if other requirements are met.
- No more than 10% of the units in the project may be owned by one investor.
- The community must be able to supply a current budget, balance sheet, income & expense statement, and, if requested, bank statements showing, (1) the association has enough funds to maintain the project’s amenities and features, (2) it maintains a reserve for capital improvements and deferred maintenance amounting to 10% of the expense budget, and (3) its funds are adequate to pay insurance premiums and deductibles. Alternatively, a reserve study might suffice.
- The Association cannot prohibit leasing of units, however, it can impose certain regulations on renting, limit lease terms and limit the number of overall units occupied by renters.
- An explanation of the type, purpose and impacts of any current or special assessments.
- An explanation of any pending lawsuits (not including any routine foreclosure of a unit).
Like any federal program, there are sub-points and definition details applicable to these requirements. Also, exceptions to some of these requirements are available. The FHA also calls these requirements “temporary” for now. The FHA has tentatively settled on these requirements as indicators of high probability of success of a condo project.
FHA Condominium Project Approval Guide
The FHA makes available a Condominium Project Approval and Processing Guide which was last published in 2011. It also publishes updates to the Guide made since 2011. There are variations in the requirements for condominium communities with special characteristics like designed live-work projects, properties converted to condominiums or rehabilitated into condominiums, and new construction.
FHA approval, which is also referred to as FHA “certification,” will expire two years after a community is placed on the FHA list of approved condominiums. However, a condominium can recertify for another two years by submitting a request that verifies the community still meets the approval requirements. Recertifying is designed to be a much lighter paperwork burden than gaining original FHA approval. The association or its manager or attorney are readily recognized as authorized to apply for an extension of FHA approval.
There are a number of reasons why mortgage borrowers like FHA loans. A FHA loan may allow for a lower purchase down payment and be approved at lower credit scores than comparable conventional loans. FHA loans can also be assumed when the condo is sold. In a rising mortgage rate environment, assumable loans could improve a condo’s marketability. Condo associations without FHA certification should seriously consider gaining it.
If your condo association needs to makes changes to meet FHA approval requirements, contact us for help.