FHA May Ease Rules on Condo Mortgages/Loans

Blog post by David Swedelson, Condo lawyer, HOA Attorney and Senior Partner at SwedelsonGottlieb, Community Association Attorneys

We receive a lot of inquiries regarding FHA loans. Many condominium association boards have not sought or obtained approval from the FHA as a result of objections to the agency’s strict criteria. Many California condo associations have found that the requirements to difficult to comply with. Things could be changing. Recent news articles state that “the Federal Housing Administration is readying changes to its controversial condominium rules that have rendered large numbers of units ineligible for the agency’s low-down-payment insured mortgages.”

“The revisions could remove at least some of the obstacles that have dissuaded condominium homeowner association boards from seeking FHA approval or recertification of their buildings for FHA loans in the last 18 months. Under the agency’s regulations, individual condo units in a building cannot be sold to buyers using FHA-insured mortgages unless the property as a whole has been approved for financing.”

“FHA officials defend their requirements as prudent and necessary to avoid insurance fund losses but have expressed a willingness to reconsider some of the issues that have upset condo owners and the real estate industry.”

Among the biggest areas of criticism of the FHA’s rules are its limitations on:

• Non-owner occupancy. The agency requires that no more than 50% of the units in a project or building be non-owner-occupied. This rule has made large numbers of condominiums ineligible for FHA financing, where investors have purchased units for cash to turn into rentals. And in California, it is going to be increasingly difficult for condo associations to be able to control the number of rentals with the January 1, 2012 implementation of Civil Code Section 1360.2 that prohibits community associations from implementing CC&R amendments that restrict rentals.

• Delinquent condominium association fee payments. The FHA refuses to approve a project where more than 15% of the units are 30 days or more behind on payments of condo assessments to the association. This has been a problem for many associations, considering the large numbers of delinquent associations as a result of the Great Recession (it may be over, but there are still a large number of associations where some owners have not paid for years).

• Nonresidential space usage. The FHA has set a cap of 25% of the total floor space in a project for commercial use. This is an unrealistic requirement, considering the large increase in the last 10 years in multi-use condo associations where the developers purposely included commercial space with residential units.

The FHA has imposed a number of other requirements, including those related to insurance and reserves, as well what has been characterized as a “highly controversial rule that associations interpret as creating harsh legal liabilities for condo board officers if applications for FHA approvals contain inaccuracies.”

Andrew Fortin, until very recently an executive with CAI and now vice president for government and public affairs at Dallas-based Associa, said many [condo] boards, facing the prospect of severe penalties, have refused to apply solely because of this personal liability burden.

According to the news article, the FHA is expected to clarify the personal liability language and make other modifications in its forthcoming rules. “Whether the changes will be enough to persuade homeowner boards to apply for approvals in large numbers is uncertain, but industry experts say they – and residential unit owners – are likely to welcome whatever loosening of the current restrictions FHA can offer.”

Questions regarding FHA compliance? Contact SwedelsonGottlieb via email: info@sghoalaw.com

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