The Basics of Condominium Financing Using an FHA Mortgage UPDATED
07/24/2009

Back in February, I posted an article highlighting the basics of fha condominium financing.  This article has been well received and used by many as a reference tool, so when HUD decided to completely redefine the condo approval process in mortgagee letter 2009-19, I wanted to try to summarize their 14 page document.

Beginning October 1, 2009, spot approvals on individual condo units will no longer be allowed.  Instead, the entire condo project must be determined to be eligible by the lender or by HUD.  HUD will continue to maintain their list of eligible developments.  And for all FHA applications after October 1st, the condo project in question must either be on this list or must be added to the list prior to the loan closing.

How does a complex get added to the list?  The lender can follow one of two processes.  HRAP (HUD does the review and approval) or DELRAP (the lender does the review and approval).    Each of these involve reviewing the development for compliance with HUD’s guidelines.  Below are a few of the highlights, but there are additional requirements that you can see in Mortgagee Letter 2009-19.

• Projects consist of two units or more.
• Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.
• Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation in 24 CFR 100.
• 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.
• No more than 10 percent of the units may be owned by one investor. This will apply to developers/builders that subsequently rent vacant and unsold units. For two and three unit condominium projects, 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; and only one unit can be conveyed to non-owner occupants.
• No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
• At least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. Valid presales include an executed sales agreement and evidence that a lender is willing to make the loan. 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).
• Projects consisting of three or less units will have no more than one unit with FHA financing.  With four or more units, no more than 30% of the units shall have FHA financing.

In Summary:

• HUD has taken huge losses on condos over the past couple of years partially due to abuses of the spot approval process
• Spot approvals are dead as of 10/1/2009
• As of 10/1/2009, expect a huge bottleneck as HUD is flooded with project approval packages
• Get your condo sellers to sell now while FHA financing is available
• Get your condo buyers who need the 3.5% downpayment option of FHA to buy NOW while financing is available
• All future FHA condo financing requires entire project to be approved
• HUD has somewhat simplified the project approval process
• All approvals expire after 2 years - and this includes projects which were placed on the list prior to 10/1/2009

If you are a real estate agent who works with a lot of condo buyers or who lists a lot of condos, act now to get those buyers and sellers off the fence.