FHA Eases Condo Financing Rules

In good news for those in the condo market, the Federal Housing Administration has revised its rules for condo financing, undoing years of frustration at rules that made most condos ineligible for FHA loans and their benefits.  The changes were issued and came into effect on September 13, 2012.

The FHA requires that certain aspects of condo buildings or developments be certified before any unit can be financed or refinanced with an FHA loan.  The certification process is designed to gather information about the physical, legal, and financial condition of the condo building or development.  The process has been criticized as costly and unrealistic, and the FHA ceased to have much of a presence in the industry after the enactment of these procedures.  The result was damage to the national housing market and everyone involved in it.  The FHA fell way below its projected number of insured condo loans issued during the fiscal year 2012.

As this process was clearly not working, these changes are welcome news for those in the condo industry and the housing market as a whole.  The new rules are expected to make it easier for condo associations to get FHA certified, thus increasing the availability of FHA loans.  As many buyers prefer to use FHA financing, condo sales are likely to increase.

NOTABLE REVISIONS TO FHA ELIGIBILITY RULES FOR CONDO BUILDINGS

ASSOCIATION OFFICER LIABILITY

The new rules revise the language used to describe personal liability for association boards and officers.  The previous language required boards and officers to attest that they had “no knowledge of circumstances or conditions that might have an adverse effect on the project” or “disputes concerning unit owners,” among other broad attestations.  This made the typically volunteer position of condo board officer much less appealing to those who may have otherwise been interested.  The new language is less intimidating, and will make such involvement more attractive.    However, the penalties assigned to  “knowingly” and “willfully” submitting false information to FHA remain severe.

ALLOWED % OF OWNERS BEHIND ON ASSOCIATION DUES

Additionally, condo associations can be certified even if 15% or less of the owners are behind on their monthly fees for up to 60 days, whereas before the time restriction was only 30 days. In an economy in which many owners struggle to pay their fees, this is good news.

ALLOWED % OF INVESTOR-OWNED UNITS

As for investors, they can now own up to 50% of the total units, if at least half are occupied by other owners.  Previously, this was only 10%.

ALLOWED % OF COMMERCIAL SPACE

Also, the amount of space that can be used commercially has been increased to 35% from 25%.  In certain cases, it could be up to 50%.  This is crucial because of the development of urban condos that contain retail stores and offices and depend on them to generate revenue to finance the development.

INSURANCE COVERAGE OF MANAGEMENT COMPANIES

The insurance rules for associations have also been changed for condos that use management companies.  Such companies no longer have to obtain separate fidelity insurance for each condo, but have the option of being named on the association’s policy as an insured or be subject to the policy under an endorsement on the policy.

While the FHA refers to the rules as “temporary adjustments” in response to changes in the market, they may become permanent if they have the desired effect on the housing market.  Some in the industry hope for additional changes, such as lowering the requirement that 50% of a condo development’s units be sold to third-party buyers before it is eligible for FHA financing – a difficult task when most people want to use FHA loans, but these new rules are a step in the right direction for those involved in the condo market.