Condo associations are still struggling to meet Federal Housing Administration certification requirements for mortgages insured by the federal agency. Here’s the latest FHA condo certification news.
Can Your Condos Meet FHA Rules?
The FHA guarantees home loans offered through conventional lenders. FHA loans allow homebuyers to use a smaller down payment and sometimes to have lower credit scores than lenders require for conventional mortgages.
Under rules issued in 2009, the FHA guarantees loans for condo purchases only if the entire association has been approved for FHA financing. That’s required many condo associations to go through the FHA’s “recertification” process. It’s strict, and many condos haven’t been able to pass the FHA’s restrictions.
On June 30, 2011, the FHA “consolidated and updated” its approval requirements through Mortgagee Letter 2011-22 and a companion implementation schedule and guide.
“Mortgagee Letter 2011-22 is still in effect,” explains Lisa A. Magill, a shareholder and association attorney at Becker & Poliakoff PA in Fort Lauderdale, Fla. “The FHA has allowed for certain types of exceptions to its requirements if you meet the exceptions.”
One rule often bars certification. “The FHA won’t certify a property that has more than 15 percent delinquencies, and it counts delinquencies as those accounts overdue for more than 30 days,” says Magill. “That’s a major problem.
“The FHA has also modified its rules to include properties or units taken back by lenders in foreclosure, but lenders never pay,” adds Magill. “Now lenders who don’t pay their monthly assessments are included in the 15 percent calculation. That kicks out a lot of associations now.”
There are now exceptions to the 15 percent rule, but those aren’t much easier for most condos to meet. “The FHA has a whole list of requirements condos have to meet to make an exception to the 15 percent rule,” reports Magill. “You can’t have more than 20 percent of your accounts in arrears for more than 30 days, but if you’re in between 15 and 20 percent, you can try for the exception.” You’ll have to provide:
- Owners’ payment histories for the past 12 months
- Your reserve fund balance
- A budget that includes a line item for bad debt and delinquencies
- A reserve study that’s no older than two years
- Information or assurances that you’re taking legal action to collect debt you’re legally entitled to collect
“Two more budget issues also kick you out of certification,” adds Magill. “Your condo association has to give the FHA its budget, and the FHA will determine if it’s adequate. I don’t know how they determine that. Also, you have to show you’re collecting for reserves of 10 percent of the total budget and that you have some allowance in the budget to pay for any insurance deductible you have. The reserve requirement is a big one in Florida because owners are allowed to vote reserves out. So unfortunately most associations don’t budget for reserves in Florida. And if they don’t, they won’t qualify for FHA certification.”
Bottom line? “It’s a very small window to meet certification requirements,” concludes Magill. “There are a lot of associations that are kicked out of eligibility. A lot of condo associations aren’t even aware they have to recertify, and even then recertification is good only for two years if you do qualify. Very few of the associations that were certified in the past have taken any action to recertify or continue their certification.”
How few? You can check how many and which condo associations have received FHA certification in your state. Magill did a search for Florida and turned up 421 certified associations. “That’s terrible,” she says.
The upshot is that buyers will have fewer financing options for non-FHA certified condo associations, thereby making resales more difficult in an already-sluggish real estate sale market. “Right now, it’s so difficult to obtain mortgages generally,” says Magill. “Obviously, FHA-approved properties are more desirable because there are more mortgages available. If a condo isn’t FHA certified, buyers will have to go to a conventional loan.”
Can Others Help Get Your Condo Certified?
You’ve probably received solicitations from companies touting their ability to help your condo get certified by the FHA. Are those offers worth pursuing? That depends on your association and whether a quick check shows you’re even in the ballpark of qualifying.
“It’s a tough topic because I’m not sure if anyone really knows how to get certified in today’s market,” says Chris Yergensen, senior vice president and corporate counsel of RMI Management LLC, a Las Vegas–based company that manages about 300 condo association and HOAs. “There are third-party companies claiming to be experts and marketing to our condos offering help to certify the community–for a fee, of course. The general word on the street is that it’s a rip-off because most condos won’t qualify no matter how much help is offered from these companies.
“I’m speaking from my experience in Nevada,” adds Yergensen. “There are minimum qualifications, including ones governing primary versus secondary ownership at the condo association. A lot of our condos don’t fit that requirement because many of our owners are investors who own second or third homes. The condo associations won’t even meet that primary-ownership requirement from the get-go. It’s also easy to look at the minimum requirements regarding vacant units and units in default to see if your condo will qualify. With condo associations that may be close to meeting the requirements, those companies may be able to help get them certified.”