FHA UPDATE: TEMPORARY GUIDELINES A START, BUT MORE WORK TO BE DONE

(This article by Adam Bazelon was recently published in the Community Leader magazine, which is a publication of the Wisconsin Chapter of Community Association Institute.)

The number of condominiums obtaining FHA (Federal Housing Administration) certification has continued to shrink.  This is due, in large part, to the fact that the U.S. Department of Housing and Urban Development (HUD), which administers the FHA certification approval process, has imposed stringent eligibility requirements.  Condominiums that have obtained FHA certification in the past find themselves being rejected two years later when they apply for re-certification, despite the fact that no material changes have occurred.  This is the result of not only more stringent guidelines being imposed, but more strict and narrow interpretations of the guidelines that are already in place.

Over the past 10-15 years, the number of FHA condo loans typically ranged from 80,000 to 90,000 per year.  In 2013, there were 57,800 FHA condo loans and only 22,800 last year.  Given this decline, there has been mounting pressure on HUD to relax the guidelines.

In response to these concerns, HUD issued temporary guidelines on November 13, 2015, which are in place for one year (as of now).  The stated purpose of these guidelines is to “increase the pool of condominium projects eligible for FHA approval, thus increasing affordable housing options for first-time and low to moderate income homebuyers.”  The benefit to current condo owners is that getting FHA approval for their condominium means a larger pool of buyers when they sell their unit.

While HUD’s stated goal is lofty and noble, many industry insiders are questioning whether the new guidelines do enough to help effectuate this goal.

The temporary guidelines make three changes.  First, they allow for a revised calculation of FHA required owner-occupancy ratio.  To obtain FHA approval, at least 50% of the units must be owner occupied.  Under the new guidelines, if a unit is “not investor owned,” it will be considered owner occupied.  So, for example, if a unit is owned as a second home and is not rented out, it will be considered owner occupied for the calculation despite the fact that it is not the owner’s primary residence.

Second, the revised guidelines allow for different types of insurance arrangements to meet the insurance requirements.  Specifically, the guidelines now permit pooled policies, state-run plans, and coinsurance policies.  In this author’s experience, this change will have little, if any, effect on the ability for Wisconsin condominiums to obtain FHA approval.

Third, the guidelines clarify the process and requirements for application for re-certification.  (FHA certification is valid for two years, and a condominium can start the re-application process up to 6 months prior to the end of the two-year period).  While there does not appear to be any significant changes here, your Association will not have to re-submit recorded amendments that have already been submitted.

If you are scratching your head as to how these changes will help get your condominium approved, you are not alone.  Some industry insiders have even questioned why HUD bothered coming out with these temporary guidelines.

That said, hopefully these temporary guidelines are a sign of more changes to come that will help condominiums get FHA certification and, in turn, will help current condominium owners sell their units when the time comes.

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