How to get FHA approval for a condo?
A lot of people do not know that many condominiums that are available for sale are not approved by the Federal Housing Administration (FHA). Meaning that FHA will now insure or offer any mortgages to condos that are not officially approved by the agency. In addition, many projects may be 100% ineligible to ever be approved for these types of loans. In this article I will go over these requirements.
II. Eligible Projects
The Condominium Project has been declared and exists in full compliance with applicable State law requirements of the jurisdiction in which the condominium project is located, and with all other applicable laws and regulations.
III. Ineligible Projects
A. Condominium Hotel or “Condotels”
B. Timeshares or segmented ownership projects
C. Houseboat projects
D. Multi-dwelling unit condominiums [i.e. more than one dwelling per condominium unit]
E. All projects not deemed to be used primarily as residential
IV. General Requirements
A. Site Condominiums (effective June 12, 2009)
Condominium project approval is not required for Site Condominiums. Site Condominiums are defined as single family totally detached dwellings (no shared garages or any other attached buildings) encumbered by a declaration of condominium covenants or condominium form of ownership. Site Condominiums that do not meet this definition will require project approval. See Loan Approval section for processing and documentation requirements for unit financing of Site Condominiums.
• Manufactured Housing Condominium Projects (MHCPs) may not be treated as Site Condominiums; these projects require approval under HRAP.
• Modular homes are processed as single family homes for insurance purposes and are eligible to be treated as Site
Condominiums as long as they meet the stated definition for site condominiums.
B. Environmental Review Requirements
If a lender elects to use the HRAP option, then environmental reviews will not be required for projects that, at the time that condominium project approval is requested, have progressed beyond a stage of construction where HUD has any influence over the remaining uncompleted construction. This occurs when:
• a condominium plat or similar development plan and any phases delineated therein have been reviewed and approved by the local jurisdiction and, if applicable, recorded in the land records, and
• the construction of the project’s infrastructure (streets, stormwater management, water and sewage systems, utilities), and facilities (e.g. parking lots, community building, swimming pools, golf course, playground, etc.) and buildings containing the condominium units has proceeded to a point that precludes any major changes.
The following requirements apply to all Condominium Project approvals:
1. Minimum number of units: Projects must consist of two or more units.
2. Insurance Coverage: Projects must be covered by hazard and liability insurance and, when applicable, flood and fidelity insurance (See Section VI, Insurance Requirements).
3. Right of First Refusal: Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation at 24 CFR part100.
4. Commercial Space: No more than 25 percent of the property’s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogenous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
5. Investor Ownership: No more than 10 percent of the units may be owned by one investor. This limitation also applies to developers/builders that subsequently rent vacant and unsold units. For condominium projects with ten or fewer units, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete.
6. Delinquent Home Owners Association (HOA) Dues: No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payments.
7. Pre-sales: At least 50 percent of the total units must be sold prior to endorsement of a mortgage on any unit. Valid presales include:
• Copies of sales agreements and evidence that a mortgagee is willing to make the loan1
• Evidence that units have closed and are occupied; OR ;
• Information from a developer/builder that lists all of the units already sold, under contract, or closed (e.g. a spreadsheet, chart, or listing used for the company’s own tracking purposes) that is accompanied by a signed certification from the developer (Attachment F).
8. Owner-occupancy Ratios: At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units.2 For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies).
9. Legal Phasing: Legal phasing is permitted for condominium processing. It is recommended that developers submit all known phases for initial project approval. FHA will not accept market phasing in lieu of legal phasing.
For vertical buildings, legal phasing is acceptable if:
a. The floors are legally phased in groupings of no less than five floors;
b. At least a temporary certificate of occupancy has been obtained and all common areas and amenities have been completed; AND
c. A third party completion bond has been obtained.
For purposes of calculating the owner-occupancy percentage and FHA concentration:
a. On multi-phased projects the owner-occupancy percentage is calculated on the first declared phase and cumulatively on subsequent phases if the ownership of the condominium project remains the same.
b. If multi-phasing includes separate ownership per phase, each phase is calculated individually.
c. In single-phase condominium project approval requests, all units are used in the denominator when calculating the 50 percent owner-occupancy
10. FHA Concentration: FHA will display the concentration information for each approved condominium development on the approved condominium listing, which can be found on both FHA Connection and on the public website at www.hud.gov .
The concentration level will be based on case numbers assigned on units in a project; FHA will not issue new case numbers once the 30 percent concentration level (plus a small tolerance to accommodate for some fall-out) has been reached in any particular development.
a. Projects consisting of three or fewer units will have no more than one unit encumbered with FHA insurance.
b. Projects consisting of four or more units will have no more than 30 percent of the total units encumbered with FHA insurance.
c. Calculation of the level of FHA concentration in a project declared with legal phases will follow the same methodology as owner-occupancy, described above.
11. Budget Review: Mortgagees must review the homeowners’ association budget (the actual budget for established projects or the projected budget for new projects) for all projects. This review must determine that the budget is adequate and:
Units sold to owners who intend to occupy the units must follow the requirements of a valid presale.
• Includes allocations/line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project;
• Provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and
• Provides adequate funding for insurance coverage and deductibles (see Section VI, Insurance Requirements).
In cases where the budget documents do not meet these standards, the mortgagee may request a reserve study to assess the financial stability of the project. The reserve study cannot be more than 12 months old. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed.
In lieu of the actual budget documents, mortgagees may request and rely on Fannie Mae form 1073a, Analysis of Annual Income and Expenses – Operating Budget, executed by an authorized representative of the seller/servicer, owners association, or management agent.
VI. Insurance Requirements
A. The condominium project must be covered by hazard, flood, liability and other insurance required by state or local condominium laws or acceptable to FHA as defined below:
• Hazard Insurance: The homeowners association (HOA) is required to maintain adequate “master or blanket” property insurance in an amount equal to 100% of current replacement cost of the condominium exclusive of land, foundation, excavation and other items normally excluded from coverage. If the HOA does not maintain 100% coverage, the unit owner may not obtain “gap” coverage to meet this requirement.
• HO-6 Coverage: In cases where the master policy does not include interior unit coverage, including replacement of interior improvements and betterment coverage to insure improvements that the borrower may have made to the unit, the borrower must obtain a “walls-in” coverage policy (HO-6 policy).
• Liability Insurance: The HOA is required to maintain comprehensive general liability insurance covering all of the common elements, commercial space owned and leased by the owner’s association, and public ways of the condominium project.
• Fidelity Bond/Fidelity Insurance: Fidelity Bond/Fidelity Insurance is required for new and established condominium projects with 20 or more units. The HOA must maintain this insurance for all officers, directors, and employees of the association and all other persons handling or responsible for funds administered by the association. The coverage must be no less than a sum equal to three months aggregate assessments on all units plus reserve funds.
• Flood Insurance: Insurance coverage equal to the replacement cost of the project less land costs or up to the National Flood Insurance Program (NFIP) standard of $250,000 per unit, whichever is less. In the insuring of a residential condominium building in a regular program community, the maximum limit of building coverage is $250,000 times the number of units in the building (not to exceed the building’s replacement cost). The HOA, not the borrower or individual unit owner, is responsible for obtaining and maintaining adequate flood insurance under the NFIP on buildings located in a Special Flood Hazard Area (SFHA). The flood insurance coverage must protect the interest of borrowers who hold title to an individual unit as well as the common areas of the condominium project. If the FHA Roster Appraiser reports that buildings in a condominium project are located in a SFHA the lender is responsible for ensuring that the HOA obtains and maintains adequate flood insurance on buildings located within the SFHA, per Mortgagee Letter 2009-37.
Closing thoughts – If you have a condo and want to make it available to a larger group of people for sale you will want to have it FHA approved. The FHA helps people with low incomes get good housing. Some of these people with the FHA’s help may be able to get into your condo to live.
The FHA approval for a condo does not usually take too long. It is up to what option you chose when it comes to the approval process. There are a few ways to get your condo approved with the FHA and some take less time than others.
The approval process can take anywhere from 5-30 days according to which option you chose. Your condo has to quality before it can be approved also. There is too much to say in this little article about the approval process but if you go to WWW.HUD.GOV you can find all the info you will need to get your condo approved with the FHA. There is a lot of info on there and it is worth
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