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   ARTICLE   |   From Scotsman Guide Residential Edition   |   March 2012

Seek FHA’s Approval

Condo projects with expired certifications may provide a new pipeline of business

Because Federal Housing Administration (FHA) financing accounts for a large percentage of the first-time homebuyer market — and condominiums are popular with first-time homebuyers — it’s essential for mortgage brokers and originators to be aware of the significant condominium policy and procedural changes that have been implemented by the FHA in the past few years.

More important, brokers and originators must be aware that, at the present time, there are hundreds of previously FHA-approved condominium projects that have failed to submit the required documentation to get recertification. The end result is that their FHA approval has expired, thus preventing current owners from selling their units to borrowers who are seeking FHA financing — even if those owners have FHA-insured loans on their properties. By partnering with homeowners associations (HOAs), developers and other parties to get these approvals, mortgage professionals could open up a significant new source of business.

Looking back

Before outlining the current procedures for getting FHA approval and recertification of a condo project, it’s helpful to understand the policies and procedures that were in effect before 2009, when obtaining FHA financing for a condominium unit was comparatively easy. What occurred in 2009 was essentially the elimination of the spot-loan process, as implemented by the FHA in 1996.

On the Web

To see the impact that the FHA’s policy changes have had on condominium projects in your state, follow these four steps:

  1. Visit FHA’s website:
  2. Click on “Search for FHA-approved condominiums.”
  3. Enter your state under the appropriate drop-down box.
  4. The condominium projects that have had their FHA-approval status expire will be noted as such in the right-hand column.

Under this process, mortgage lenders could originate and underwrite an FHA-insured loan transaction on a condo unit that was located in a project that did not have previous FHA approval. Lenders were instructed to address a number of items on a suggested checklist and, if everything was found to be acceptable, those lenders could close the loan and have it insured without the project itself being approved.

As a result, many condo units got FHA insurance when, in fact, the project in which they were located had substantial problems — enough that these should have rendered the project ineligible for FHA financing. These problems likely would have been uncovered with a more in-depth review of the project’s legal and financial documents, as is now required under current procedures.

Upon issuance of Mortgagee Letters 2009-46(A) and 46(B), the FHA effectively eliminated the spot-loan process. As a result, lenders were advised that, on purchase transactions, FHA financing on a condo unit only would be available if the project was on the FHA’s approved list.

In this regard, condo projects now can be approved by two methods: the U.S. Department of Housing and Urban Develop-ment (HUD) Review and Approval Process (HRAP), and the Direct Endorsement Lender Review and Approval Process (DELRAP). One of these two methods also must be used to process annexation requests, as well as recertifications.

All project approvals from the FHA expire two years from the date of their placement on the list of approved condominiums. Although this policy has been in effect for many years, HUD Homeownership Centers (HOCs) lacked the resources to perform substantive project recertification reviews for each and every previously FHA-approved project, especially because HOCs simultaneously had to perform approvals for projects that were already in place.

Upon the issuance of Mortgagee Letters 2009-46(A) and 46(B), the processing of condo project recertifications now can be processed under both HRAP and DELRAP methods, however. The recertification process begins six months before the approval’s expiration date, with the added availability to recertify until six months after an approval’s expiration. Extensions were initially granted by HUD for many of the previously approved condo projects to get recertification, but these extensions now have expired.

That, in turn, has brought us to the current situation: There are now hundreds of previously FHA-approved condo projects that have not been recertified. To complicate matters, if a project has not recertified within six months of its expiration, a full project approval under HRAP or DELRAP methods is required.

Key criteria

In processing a recertification request, the HRAP or DELRAP reviewer will make a determination as to whether or not the project is still in compliance with HUD’s eligibility requirements. Furthermore, the reviewer must determine that no conditions currently exist that would present unacceptable risks to FHA’s investment.

With this in mind, it’s important for mortgage professionals to be aware of the most crucial points of FHA’s project-approval criteria, as outlined in HUD’s Condominium Project Approval and Processing Guide. These key points require the following:

  • The condo project must consist of at least two units.
  • No more than 25 percent of a project or unit’s floor area can be used for non-residential purposes.
  • No more than 10 percent of the total units may be owned by a single investor. By extension, in the case of projects that contain 10 or fewer units, no single investor is permitted to own more than one unit within the project.
  • No more than 15 percent of a project’s units can be more than 30 days past due on their HOA fee payments. Under the HRAP method only, exceptions will be considered for as much as 20 percent.
  • At least 30 percent of the units are required to be sold before the endorsement of a mortgage on any unit.
  • At least 50 percent of a project’s units should be owner-occupied or sold to owners with the intent of occupying the units.
  • In cases where more than 50 percent of a project’s units are FHA-insured, the FHA won’t insure any units at all. Furthermore, new case numbers will not be issued by the FHA once a project has reached the 50 percent threshold.
  • The condominium project must be covered by adequate hazard, flood, liability and fidelity insurance. If the given HOA doesn’t maintain complete coverage of hazard insurance, unit owners are not permitted to use gap insurance to meet this requirement.
  • A right of first refusal is allowed, barring that it violates the Fair Housing Act’s discriminatory conduct prohibitions.

Finally, a project’s financial documentation has to demonstrate the availability of sufficient funds to provide all features and amenities that are unique to the project. In addition, the project’s financial documents must demonstrate the existence of requisite funds for insurance coverage and deductibles, as well as enough funding for replacement reserves that are dedicated to capital expenditures and deferred maintenance. These replacement reserves must be in an account representing at least 10 percent of the project’s budget.

• • •

Proactive mortgage originators now have a unique opportunity to work with HOAs in getting FHA approval for their projects. Hundreds of previously approved condo projects being past their approval expiration could provide a major new source of business for determined mortgage professionals.

The effort that goes into this process could result in many new FHA loan transactions, as well as countless new condominium owners being able to sell their units to FHA borrowers. In short, the current situation is rife with opportunity for everyone involved — whether loan officer, broker, homebuyer or seller.


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