New FHA Guidelines for Condominiums

New FHA Guidelines Could Amp Condo Sales

"FHA approved" may become the most popular condominium amenity in the United States soon, thanks to the new guidelines established by the FHA to take effect February 1, 2010.

The guidelines addressed the two imperatives facing condominium sales: down payments and the financial integrity of condominium associations. Both are equally important to a condominium recovery.

"FHA approved" used to mean a 3.5% down payment. Starting early next year, "FHA approved" will mean 3.5% down plus a financially stable association approved by your lender. This is huge.

According to Attorney Richard D. Vetstein, who writes the Massachusetts Real Estate Law Blog, the revised FHA Condominium Lending Guidelines include the following requirements:

To qualify for FHA mortgages, associations must:

• Maintain a reserve equal to 10 percent of the annual budget
• Make sure no more than 15 percent of its owners are more than 30 days late with condominium fees
• Allow lenders to review their financials and insurance policies
• No more than 10% of the units may be held by a single investor
• Fidelity insurance must be obtained for 20+ unit projects
• No more than 25 percent of space allowed for commercial use.

"The new FHA guidelines (combined with the almost year old Fannie Mae condominium guidelines) really make it imperative for condominium associations to get their collective acts together with respect to the financial management of the association," counsels Attorney Vetstein. "Condominium boards need to ensure that reserve accounts are adequately funded, condo fee delinquency rates are low and that the association is generally well run financially. If they don’t, they are contributing to a drag on market value for all units due to non-compliance with the new condominium guidelines.

For a new condominium to qualify for FHA financing the following guidelines apply:

Effective February 1, 2010:

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

Projects that received approval between October 1, 2008 and December 7, 2009 will be "grandfathered" and will have to follow the new guidelines’ re-certification process .

The marketing benefits are significant:

1. More buyers will enter the market because they can afford the lower down payment.
2. No single investor can purchase more than 10% of the units, so the idea of a controlled association by one or two investors is no longer a threat.
3. More inventory will offer wider choices tending to keep prices in check, as "FHA approved’ condominiums come on line.
4. More real estate agents will be willing to show condominiums to their buyers, because the lender who provides the mortgage will have to approve not only the condo documents, but the condo association’s budget, reserve account and its fidelity insurance policy.
5. New construction developers have the guidelines needed to create urgency in their pricing strategies, which is key to building and maintaining momentum.
6. Commercial lenders will have a more comfortable level with developers. While the 50% presale requirement may look obtrusive, it is actually a benefit to the developer, because it will create urgency for buyers to purchase.
7. Established associations that have dragged their feet to get their finances in order, now have a valid value-based reason to become "FHA Approved."
8. Real estate agents will show FHA approved condominiums with confidence in the association’s finances, not just because the down payment is low.
9. Forward thinking lenders will hustle to become a "an approved lender’ in resale and new communities alike
10. 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.

First time home buyers are generally thought of as the primary market for FHA financing. There is something to that, but in today’s world, many who bought their first homes years ago and lost them during this recession will appreciate the FHA financing availability even more than those coming out of rentals.

For now let’s agree that the FHA is being responsive and fair by giving new homes developers livable guidelines, associations a tool to become financially stable, and all associated with the industry, hope.

There will no doubt be other changes as the market calls for them "FHA was given a difficult task under the Housing and Economic Recovery Act of 2008 (HERA) to revamp the approval process for condominium projects, and before it established its latest guidelines, invited and was open to industry experts from organizations like the Community Associations. "As a result, significant improvements to the initial requirements have been made and dialogue continues between CAI and HUD in an attempt to create regulations that will lead to greater stability in the condominium market," Dawn Bauman, vice president of Strategic Initiatives for the Community Association Institute said. CAI is an organization representing more than 29,000 individual members, 60 local chapters, and the interests of the one in five homeowners living in a community association. For more information visit www.caionline.org.

It’s good to see that the buyer’s interest is represented. It shows. And it will pay off handsomely in the days ahead.