New Federal Housing Administration (FHA) regulations issued in June 2011 impose a number of requirements on condominium associations before a condominium property can qualify for the advantageous terms of an FHA-backed mortgage. If you are involved with condominium management or a homeowners’ association, you will be doing your community a favor if you become familiar with certain features of the new FHA rules.
The FHA Approves Condo Groups as Well as Individual Loan Applicants
The main reason why every condominium board should understand the new FHA regulations is simple: to obtain FHA-backed financing, the condo project itself as well as the individual mortgage applicant must meet certain strict FHA criteria. The difference between a mortgage with FHA insurance and one without is substantial, and significantly affects the marketability of a condo unit. An assumable FHA mortgage at a fixed rate will expand your range of potential buyers. Additionally, the down payment for an FHA condo purchase will normally be a fraction of the 20 percent down expected these days for uninsured loans.
With these considerations in mind, residents of a condo development that qualify for FHA financing will find it easier to sell a unit, and the prices will reflect the more attractive mortgage terms that buyers can generally realize with FHA backing.
Condo Associations Need to Limit Maintenance Fee Delinquency Rates
If the condominium development experiences delinquency rates greater than 15 percent on maintenance fees, mortgage applicants for its units will not be approved for FHA loans. Condo boards therefore need to develop and implement effective measures for collecting past-due maintenance fees from owners and lenders. Homeowners associations should periodically review their delinquency rates to make sure that they are on the right side of the 15 percent benchmark.
Condominiums Must Also Maintain Minimum Reserve Funds
The FHA requires condo associations to maintain a reserve fund of at least 10 percent of their annual budgets. Although resident owners can be expected to balk at the prospect of increasing their own monthly fees, they will usually be quick to understand the benefits of eligibility for FHA financing.
Newer developments or those constructed and managed on green management principles can present the case for lower reserve contributions based on actual experience and documented expenditures. If your association can demonstrate lower reserve requirements, your association might be able to reduce its FHA reserve fund obligations to as low as 2 or 3 percent.
The FHA Restricts the Level of Condo Rentals for New Developments
Although waivers are available from the FHA for the time being, the agency’s June 2011 regulations announced a flat prohibition for FHA approval of loans in new condominium developments where any of the units are rented or leased rather than sold.
Because of the importance of condo rentals while new units are being marketed, the FHA set up a waiver procedure for avoiding this prohibition through March 2012. If you are involved with the management of a new condo project that relies on rental income in the near term, you should consult with an attorney to achieve FHA financing approval while some of your units are occupied under lease.
Questions About FHA Condo Rules? Call 732-462-5770 in South Jersey
With more than 35 years of experience in the law of condominium development, financing, regulation and litigation, the commercial real estate lawyers of Accisano Law Offices can help condo boards and homeowners’ associations become familiar with the FHA eligibility criteria for condo financing. For answers to specific questions or advice about particular problems, contact us in Freehold. You can also visit our website at http://www.acclegal.com.