Condominium Boards of Directors need to know new FHA rules
Recent changes in the rules by which condominiums may be purchased with FHA financing is important for the viability of a community. If your complex has been approved for FHA financing in the past, that may change with the new rules. If you are on your Board of Directors or an association manager of a condominium HOA (home owners association), you want make sure your complex will comply with the new rules.
FHA is the primary way to finance an owner occupied purchase with low downpayment (currently 3.5%). It is not an investor loan. It can only be used by purchasers intending to occupy the property. Conventional lenders have eliminated any low down financing programs. They now require 10 – 20% downpayment as a minimum. A lot of purchases of condominiums are made by first time homebuyers, which often means limited resources for downpayment. Therefore maintaining FHA financing availability for a community is critical to keep the widest possible appeal to prospective buyers. Without it a complex has limited its potential demand/appeal and can likely result in lower prices for current owners when they go to sell.
Some of the new rules are good, such as lenders may now “warrant” condo projects instead of having to go to FHA to provide “warrantability”. Previously the approved projects were on their approved list or you could seek “spot” approval. FHA will still have the list, but it will be necessary for lenders to verify the complexes meet FHA guidelines with a Condo Project Questionnaire. The most important questions relate to:
#1 Owner Occupany – This is crtical. 50% of the units must be owner occupied or sold to owners who intend to occupy the units and not investor owned units with tenants. This figure typically comes from the HOA manager who often does not really know if the occupant can be considered as owner occupied, such as in the case of a child of the owner of record or a second home.
#2 FHA Concentration – Projects of 4 or more units cannot have more than 30% of the total units insured by FHA. In Austin, TX it is possible to determine what type of loan is on the property by seeing what type of Deed of Trust has been recorded. I can understand FHA wanting to limit their exposure on this, but this limitation will likely be the biggest single reason FHA loans will be denied in the future. This could have serious negative consequences on established projects that have had a lot of FHA financing in the past.
#3 Reserve Studies – (pay attention BoD members) A current reserve study must be performed to show adequate funds are available for funding capital expenditures and maintenance. It cannot be more than 12 months old. I understand that FHA wants to see a minimum of 10% of the income going into reserve accounts.
#4 Fidelity Bond – If a complex is over 20 units, there must be a fidelity bond in place for Errors & Ommissions insurance and to protect the members of the Board and officers.
These are just the most important rules in the new HUD policies for FHA financing. There are others. More than ever before, it will take a Realtor that is experienced in condominium sales and their financing to navigate this gauntlet. It will not be apparent from the beginning whether or not FHA financing will be available. It will have to be figured out on virtually a case by case basis.