New FHA Condominium Rules Effective February 2010 Will Boost Condo Sales and FHA Mortgage Loans

How will you want your condominium project classified next month? Try “FHA approved.” This is due to new FHA guidelines which will take effect February 1, 2010.

The new guidelines tackle the 2 most important issues affecting condominium sales -  (1) down payments and (2) the financial integrity of the condominium association.  Both are crucial to the recovery of the condo market.

Beginning in February 2010, the revised FHA Condominium Lending Guidelines include specific requirements.

To qualify for FHA mortgages, condo associations must:

1. Maintain a reserve equal to 10 percent of the annual budget
2. Make sure no more than 15 percent of its owners are more than 30 days late with condominium fees
3. Allow lenders to review their financials and insurance policies
4. Assure that no more than 10% of the units are held by a single investor
5. Obtain Fidelity insurance for 20+ unit projects
6. Have no more than 25 percent of space used for commercial activity.

Effective February 1, 2010, in order for a new condominium to qualify for FHA financing, the following additional guidelines must be met:

1. 50 percent of the total units must be presold before FHA financing is approved
2. 50 percent of the total units must be owner occupied
3. No more than 10% of units may be held by a single investor
4. Unit owners must obtain individual HO-6 insurance policies if the master policy doesn’t cover interiors
5. Recertification is required every two years

Projects that received approval between October 1, 2008 and December 7, 2009 will be “grandfathered” but will have to follow the new  recertification process .

The new rules entail phenomenal marketing benefits for condos:

• More buyers will enter the market because they can afford the lower down payment.
• No single investor can purchase more than 10% of the units, so the idea of an association controlled by one or two investors is no longer a threat.
• As more “FHA appproved” condos enter the market, more inventory will offer wider choices tending to keep prices in check.
• More real estate agents will be willing to show condominiums to their buyers because the lender providing the mortgage will have to approve not only the condo documents, but the condo association’s budget, reserve account and its fidelity insurance policy.
• New construction developers have the guidelines needed to create urgency in their pricing strategies, which is key to building and maintaining momentum.
• Commercial lenders will have a higher comfort level with developers. While the 50% presale requirement may seem formidable, it is actually a benefit to the developer because it will create urgency for buyers to purchase.
• Established associations that have dragged their feet to get their finances in order now have a valid value-based reason to become “FHA Approved.”
• Real estate agents will show FHA approved condominiums with confidence in the association’s finances, not just because the down payment is low.
• Aggressive lenders will hustle to become approved lenders.
• Knowing the property already has approved lenders will make competition for listings tighter and will attract more buyers and more prospects to the listing.
• Brokers taking listings in condo communities without FHA financing will be competing with ones that do, making it important for associations to serious consider becoming FHA approved.

There will no doubt be other changes as the market calls for them.  The latest guidelines are described in two separate FHA Mortgagee Letters:

Mortgagee Letter 2009-46B (the revised guidelines for FHA approval of residential condominium projects).

Mortgagee Letter 2009-46A (temporary guidance for condominium approvals).

Under the Temporary Guidance, the “Spot Loan” approval process will continue through February 1, 2010.  Thereafter, it will be replaced by the new Direct Endorsement Lender Review & Approval Process (DELRAP).  Further, the 30% cap on FHA loans per condo project will be expanded to 50% until December 31, 2010.  Concentrations may be increased to 100% if certain additional conditions are met.  After January 1, 2011, the cap reverts back to 30%.

Condominium project approval is not required for condominiums comprised of single-family totally detached dwellings where there are no shared garages or any other attached buildings.  The 1-year waiting period for conversion condominiums is eliminated.

Here is FHA’s transition strategy:

1. FHA will move all currently approved condominium projects to the new approval list and FHA Connection.
2. Projects that received approval prior to October 1, 2008, will require recertification on or before December 7, 2009.
3. Projects that received approval between October 1, 2008 and December 7, 2009, will be “grandfathered” and will have to follow the recertification process under the new guidelines’ recertification process.

It will be interesting to see exactly how much condominium sales will increase after this change in guidelines.