A condo association has many jobs aside from overseeing the development and caring for the common areas. As condo units turn over and people want to purchase them, they need access to various forms of financing. Most government-backed financing options require approval from the appropriate entity in order for the financing to go through. This includes FHA approval. The FHA must approve your development for FHA financing before any borrower can close on the purchase of a unit with FHA financing. Even if your development obtained approval from the FHA when they first opened, you need recertification every 2 years in order to stay eligible.
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Why you Should Care about FHA Approval for your Development
FHA approval helps you sell your condominium units. It is the most flexible and affordable financing available to low to middle-income borrowers. Without approval, you could miss out on a large portion of the real estate market simply because of your inability to provide FHA financing. Because many homebuyers that purchase a condo are first-time homebuyers, they usually do not have the 20% required down payment for conventional loans or the money to afford the Private Mortgage Insurance conventional loans charge on loans with more than an 80% LTV. The FHA allows down payments as low as 3.5% of the sales price and offers assistance with closing costs, both of which are attractive for first-time homebuyers. Without approval to allow FHA financing in your development, you could lose a significant portion of your targeted audience.
Was your Development FHA Certified at One Point?
An important factor regarding FHA certification for condos is the fact that the approval does not last forever. In fact, it is only good for 2 years. This means that if your certification occurred more than 2 years ago, your development is no longer certified. There is a small window of opportunity for you to recertify your development without going through the entire process all over again, though. If you recertify between 6 months before your certification expires and 6 months after it expires, you can go through the simplified recertification process. If, however, you wait until the expiration is beyond 6 months, you will have to go through the entire procedure again.
How can a Development Become FHA Approved?
In the past, condo units were able to undergo “spot approval.” This meant that individual units could secure FHA approval. Today, however, the entire development needs approval in order for any borrower to secure FHA financing.
When an entire development has FHA approval, it means that borrowers can purchase individual units with FHA financing. The approval certifies that the development meets the specific guidelines that the FHA requires. It also means that the banks loaning the money can feel secure in the fact that the risk of default decreases as a result of the development meeting the specific criteria.
There are two ways that you can secure approval:
– HUD Review Process (HRAP)
– Direct Endorsement Lender Review and Approval Process )DELRAP
HRAP refers to associations that seek approval directly from HUD. These associations send a complete package with all required documents to the FHA Homeownership Center where the professionals evaluate the file. Typically, the process takes around 30 days if you provide a complete package. If your package is not complete, however, you could have a few month wait ahead of you as you resend in the appropriate documents and go through the queue again.
DELRAP refers to Direct Lenders that have FHA endorsement to approve condominium associations. The final approval still goes through HUD, but the lender does the preliminary work, making the approval process faster for the association in the long run.
What are the FHA Condo Approval Requirements?
There are certain requirements that your development must meet in order for the FHA to consider it for approval. They are as follows:
– There must be two or more units in the property
– One owner cannot own more than 50% of the units
– The number of homeowners late on their association dues cannot exceed 15%
– The association must carry proper hazard and liability insurance
– At least 50% of the units must be owner-occupied
– The association’s budget must accurately cover all expenses and have required reserves
– The maximum amount of floor space allowed for commercial purposes is 50%
– The control of the development must pass to the association in a timely manner
Required FHA Condo Approval Documents
Every development will require different documents depending on the phase they are in, such as presale, under construction or existing. In general, however, you need to provide the following documents for FHA approval:
– Recorded Plat
– Recorded site plans
– Articles of Incorporation
– Bylaws
– Budget – either proposed or actual
– Agreement for structure of management
– Proof of transfer of ownership of the development to the owners
– Flood map
– Documents regarding any litigation against the development
– Documents regarding any special assessments the development may charge
What are the FHA Condo Budget Requirements?
A large part of FHA approval for condo associations is the budget requirements. In particular, the FHA wants to see that your reserves are at an adequate level. In general, at least 10% of your budget must go towards the association’s reserves. The amount of required reserves depends on a variety of factors including:
– The amount of all insurance policies as the reserves need to cover the entire amount of the insurance
– The amount of projected capital repairs and/or replacements for the next two years as determined by your Reserve Study
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In addition, the reserve funds must sit in a separate count that does not comingle with the association’s operating funds.
The FHA Condo Insurance Requirements
Just as important as the association’s budget and reserves are the condo insurance requirements for FHA condo approval. Every development must have a master policy that covers 100% of the replacement cost of the building. In addition, the development must have a liability policy that covers all other areas of the property, including common areas in the event that someone got hurt or suffered damage as a result of being on the property.
If your development has more than 20 units in it, the FHA also requires that you have a Fidelity Bond, otherwise known as an Employee Dishonesty policy. This covers anyone that handles the development’s money. The insurance must cover at least 3 months of total assessments on the units in the building plus any funds in reserves.
Last, but not least, the development must have sufficient flood insurance if the building is located in a 100-year floodplain as determined by FEMA.
The FHA Condo Delinquency Rate
The number of homeowners delinquent on their homeowner’s association dues plays a role in your development’s ability to gain FHA approval as well. As of today, according to the FHA, no more than 15% of the homeowners can be late on their dues for more than 60 days in order to be eligible. This means 15% of all occupants, whether owner-occupied residents, investors or even vacant properties.
The Maximum FHA Condo Investor Ratio
Today, any one investor can own up to 50% of the units in the building as long as the remaining 50% of the units are currently owner occupied. This means that the people that own the remaining 50% of the units must live in the unit themselves, they cannot purchase it as a second home or investment property. This ratio is new to the FHA rules as of late last year, as the maximum number of units any one investor used to be able to own was 10%.
What are the FHA Condo Presale Requirements?
The hardest type of certification to get is when your development is still in the presale status. Of course, this is a great time to obtain certification because you can gain the attention of many more borrowers; however, the FHA has a much higher risk level at this point. In order to gain approval, in addition to the standard required documents, you will have to prove that at least 70% of the units have already sold, leaving just 30% open to FHA financing.
The process to gain FHA approval for your condo association is time-consuming, but is not that difficult. Gaining the help of your attorney or a third party service that offers assistance with FHA approval can make the process even easier. There are many reasons why you should consider seeking FHA approval and keeping that approval upon expiration including the fact that it helps not only potential buyers find a home, but it also helps keep the value of your condos up because the ability to sell to a wider market makes it easier to sell.
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