New FHA Guidelines for Condos

Posted on October 13, 2009 by admin 
Filed under FHA Mortgagee Letters, FHA news, Mortgage News · Tagged:

Under revised guidelines set to go into effect November 2, 2009, the Federal Housing Administration is implementing a new stricter approval process for condominiums to be eligible for FHA home financing. Similar in some respects to the new Fannie Mae regulations issued earlier in the year, the FHA guidelines will surely slow down condominium mortgage financing, and negatively impact first time home buyers for condominium units.

The FHA mortgage loan program designed to help more people finance homes, and more borrowers will qualify with FHA financing than with conventional financing. It is a low down payment (3.5% down) program and the credit standards are much looser. The mortgage rates are typically better, as well.

New Project Eligibility Guidelines

All condominiums (consisting of 2 or more units) must meet the following requirements:

• At least 50% of the units of a project must be owner-occupied or sold.

• Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.

• No more than 15% of units can be in arrears of their condominium fees.

• No more than 25% of the property’s total floor area in a project can be used for commercial purposes.

A current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. The regulations don’t define what is “adequate” but guidance may be found in the new Fannie Mae guidelines which mandate at least 10% of annual operating budget in reserves.

• No more than 10% of the units may be owned by one investor.

• Rights of first refusal are permitted unless they violate discriminatory conduct under the Fair Housing Act.

• An affirmative action-type housing plan is required for both new construction and conversions.

• Previously certified projects must re-apply every 2 years.

• The “spot approval” process is eliminated in favor of a more comprehensive review process.

The net effect of these new guidelines, combined with the recent Fannie Mae guidelines, is that it will be much tougher to obtain condominium financing as many projects will not be able to pass muster. Condominium associations, trustees, managers, lenders and buyers need to prepare and do a lot more work to approve condominium loans.


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