FHA Update: “Temporary” Guidelines Are Extended

(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.)

To the federal government, “temporary” can mean a long time . . . and that is not always bad!  The last time I wrote about FHA financing here, I discussed several “temporary” changes in the criteria for FHA certification.  These changes—which were announced in 2012 and were set to expire this year—made it easier for condominium associations to obtain FHA certification.

The good news for condominium associations is that the U.S. Department of Housing and Urban Development (“HUD”), which administers the FHA certification approval process, extended those changes for another two years and they are now in place until at least August 2016.

You probably recall that the Federal Housing Administration (“FHA”) is a federal agency that insures mortgage loans issued by private lenders to protect them against losses as the result of homeowners defaulting on their mortgage loans.  However, FHA will only insure such a loan for a condominium unit if the condominium association has obtained FHA certification.

FHA certification is a worthwhile endeavor for many associations because it may increase the pool of would-be purchasers who can obtain financing for the units.  Purchasers that may not qualify for conventional financing may qualify for an FHA-insured loan.

To obtain FHA certification, a condominium must submit its governing documents, financial statements, proof of insurance and other information to HUD so that HUD can assess the long-term stability and financial health of the association.  If the submissions comply with the standards and guidelines set forth by HUD, the condominium will get certified and FHA can then insure loans issued to purchase homes in that condominium.

A brief summary of some of the important changes that were made in 2012 and that are extended to 2016 include the following:

Delinquencies.  No more than 15% of the units can be delinquent in the payment of assessments.  All units in the condominium are counted, including units in foreclosure, investor-owned units, bank-owned units and abandoned units.  The temporary guidelines do not consider a unit to be delinquent in the payment of assessments until the assessments are more than 60 days past due.  The previous guidelines used a 30 day cut-off, and this change will result in fewer units being deemed “delinquent.”

Investor Ownership.  Under the temporary guidelines, an investor may own up to 50% of the total units in the condominium.  Previously, if an investor owned more than 10% of the units, the condominium would not be eligible for FHA certification. 

Insurance Requirement.  For condominiums with more than 20 units, the association must obtain Fidelity Insurance (also known as “Employee Dishonesty” or “Crime Policy”).  This insurance protects the association from theft or embezzlement.  The coverage limit must be sufficient to cover at least three months of assessments on all units plus the amount in the reserve account.  If the association has a property manager, the property manager must also have its own Fidelity Insurance or be covered under the association’s policy.  The temporary guidelines provide more options and flexibility in terms of the type of Fidelity Insurance coverage that the property manager must have.

Although not part of the temporary guidelines, some other important FHA criteria to keep in mind if your association is considering apply for certification include the following:

Reserve ContributionThe association must contribute at least 10% of its annual income to a reserve fund, which should be included as a line item in the budget.  (Note that this is not a legal requirement under Wisconsin law, but is required to obtain FHA certification).

Compliance with State and Federal Laws.  The Association’s governing documents—including the Declaration, Bylaws, and Rules and Regulations—must be in full compliance with all state and federal laws.

RentalsAt least 50% of the units must be owner-occupied.  HUD will allow some limited restrictions on rental of units, but will not certify a condominium that has a complete ban on rentals.

FHA certification is offered only at the association level, not to the individual unit owners.  Thus, the responsibility for applying and qualifying for FHA certification is left to associations and their boards.  There is no application fee to apply for FHA certification, but given the scope and breadth of the documentation and information required for the application, many associations chose to use an attorney or FHA consultant to help them navigate the process.

It is also important to keep in mind that FHA certification only lasts for 2 years, at which point the Association must re-apply.  Applications for re-certification are accepted starting 6 months before the expiration date.

For many Wisconsin condominium associations, the extended “temporary” guidelines make FHA certification possible, and in turn make their communities more marketable.

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