Prior to the “Great Recession,” condo associations did not give much thought to FHA financing. For many years, FHA provided less than 3 percent of all financing for condo purchases. The buyers they financed had low down payments, which many boards felt posed a risk to their viability as residents. This conventional wisdom governed the market for many years. However, this thinking is now obsolete as the housing crisis has changed FHA from a minor factor in condo finance to the standard setting organization for condo financing. If your association is still trapped in traditional thinking about FHA, you may be jeopardizing the marketability of units in your development.
When the housing market collapsed, it drove the two organizations responsible for most mortgages in the market, Fannie Mae and Freddie Mac, into conservatorship. As the condo market suffered a bigger hit versus single family homes, lending for condo purchases essentially evaporated. The FHA became one of the few underwriters willing to insure condominium mortgages. As a result, its share of mortgage finance grew from less than 3 percent of condo sales in 2005 to as much as 40 percent of all condo loans in some markets in 2011.
At the same time, FHA made several controversial changes to its condo mortgage approval process. First, it eliminated the spot-approval process where a bank would work with the buyer and the association to approve mortgages as needed. It replaced the spot-approval process with a requirement that the entire condominium association needed approval before any FHA mortgage would be issued to a buyer for a unit. This change shifted the burden of FHA approval from lenders to the association. Many boards discovered this when sales of units in their association fell through, leaving angry unit owners in the lurch. To make matters more confusing, many commercial banks, fearing a repeat of losses from the housing crisis, began underwriting non-FHA loans to new FHA standards.
To get FHA certification, FHA established stringent criteria for the financial health of the condominium association. In fact, getting a condominium association FHA-certified is now very similar to the process of applying for a mortgage. FHA has set benchmarks that condominium associations must meet to be approved. Among the requirements are:
- No more than 15 percent of units 30 days delinquent in assessments
- At least 50 percent of the units must be owner-occupied
- The association budget must be adequate and set aside at least 10 percent of the budget for reserves
- No more than 10 percent of the units can be owned by an individual investor or entity
- The association must carry specified insurance policies.
FHA’s requirements have been changing frequently, and many associations have struggled to get FHA certification as a result. Due to the expanded role FHA is playing in the condo market, associations boards should proactively assess the need to obtain certification and if their association is in line with current requirements.
VP Government & Public Affairs