The Housing Opportunity Through Modernization Act of 2016, which was signed into law by President Barack Obama on July 29, makes condo financing insured by the Federal Housing Administration more accessible to homebuyers.
Essentially, the law eases re-certification of condominium projects to make the process “substantially less burdensome”, aligns transfer fees with the Federal Housing Finance Agency (FHFA)’s standards, and lowers owner-occupancy requirement.
FHA has been one of the primary sources for condo financing because of its low-down payment and interest rate loans. For some first-time buyers, young couples, and others with low and medium income, a condo unit may be more affordable than a traditional house.
However, the agency’s role has changed as its rules have become onerous, as critics would like to point out. The past years or so saw the FHA financing mortgages totaling 80,000 to 90,000 condominium units a year, vis-a-vis last year’s volume of 23,000, according to The Washington Post. FHA’s condo lending activity in the first quarter of the year showed 8.6%, down from the previous quarter, Chicago Tribune reported, citing Inside Mortgage Finance data.
FHA Condo Financing: Criticisms and November Guidance
Industry and lobbying groups have called on reforms to FHA’s condo program for the benefit of buyers and sellers.
In particular, the FHA requires condominium projects to apply for recertification every two years to ensure continued compliance with its eligibility standards. Individual condominium units cannot pass FHA eligibility unless the government approves the respective condo association’s insurance, reserves, budget, and other items; Chicago Tribune noted. The FHA also requires 50% owner-occupancy percentage – meaning that these units must be occupied by owners as their principal residence or secondary home.
These restrictions have made some condominium associations back out of the program, with only about 14,000 out of more than 150,000 condo associations in the U.S. eligible for FHA-insured financing, reported Chicago Tribune, citing data from the Community Associations Institute.
Against this backdrop, the FHA temporarily eased requirements for approval of condominium projects back in November, pending a more comprehensive rule change. The guidance basically showed:
A streamlined process for obtaining condominium project recertification in that only documents reflecting substantive changes since the project’s approval be submitted for recertification.
A revised calculation of the owner-occupancy percentage to allow units, like second homes, to be considered owner-occupied for the purpose of condominium project approval.
An expanded eligibility for condominium project insurance coverage to include coinsurance policies, pooled insurance policies,and state-run plans.
Revised FHA Condo Rules
The Housing Opportunity Through Modernization Act of 2016 or HOTMA contains a myriad of reforms to rural housing, housing for the homeless and veterans, and rental assistance/public housing.
Specifically, Title III of HOTMA modifies FHA rules for insuring mortgages on condominium units. These are:
Project Re-certification. The agency will streamline the process for certification of condo projects so that recertifications will be substantially less burdensome than certifications. It will also consider to (i) lengthen the time between certifications for approved condo projects and (ii) allow that information be updated instead of being resubmitted.
Commercial Space. The agency may provide exceptions as to how much space in a condominium project is permitted to be used for commercial or nonresidential purpose, subject to standards the agency considers appropriate.
Transfer Fees. The agency will apply the same standards used by the FHFA, regulator of Fannie Mae and Freddie Mac, with respect to encumbrances under private transfer fee covenants.
Owner Occupancy. The agency will issue within 90 days after the enactment of the bill into law a guidance with respect to the percentage of units that owners must occupy as either principal or secondary residence, or that have to be sold to owners to meet that requirement. Failure by the agency to issue such guidance within the 90-day period will mean that these provisions will apply:
35 percent requirement: At least 35% of all family units in a condo project must be occupied by owners as either their principal or secondary residence, or these units must be sold to owners who intend to meet the above requirement.
The agency may increase the owner-occupancy percentage, either on a regional or a project-by-project basis, subject to certain factors.
With these changes enacted into law, more homebuyers will definitely find it easier to buy a condo unit eligible for affordable financing, something FHA loans are known for.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.
