/ Finance

FHA Certification – What You Need to Know

The U.S. Department of Housing and Urban Development (HUD) issued a Mortgagee Letter (2009-46B) on November 6, 2009.  This letter specifies the requirements for condominium associations to obtain Federal Housing Administration (FHA) mortgage insurance certification.  These new requirements eliminate “spot loan” approvals (Mortgagee Letter 1996-41) and now require that entire condominium projects are FHA certified.  Therefore, if a potential buyer is in need of an FHA backed loan, the condominium association must be FHA certified. Why is this significant?  This is significant because the number of FHA insured mortgages have increased significantly over the past few years.  In 2007, only approximately 5% of mortgages were FHA insured; this number grew to nearly 20% in 2008. What is significant about FHA insured mortgages? FHA mortgage insurance protects lenders in the event that a borrower defaults on their mortgage.  FHA loans are guaranteed bank loans by the federal government which serve as an insurance policy to lenders.  Approximately 35% of all available money for loans comes through FHA. In order for borrowers to obtain a standard FHA insured mortgage loan, borrowers must invest a down payment of 3.5% but less than 20% towards the purchase of a unit. Borrowers who invest a down payment of more than 20% do not need a FHA insured loan. Why is this significant for my community? Because of the increased need of FHA insured mortgage loans, communities may have difficulty selling units if the project is not FHA certified.  This affects the marketability of a community. Should the board of directors in a community decide not to pursue FHA certification for their community, the board lends itself to liability due to the potential reduced marketability of the community. What is the cost for FHA certification? There is no cost to apply for FHA certification with the government.  However, the certification process should be prepared by a legal professional, as there are legal implications if the association provides incorrect information.  The cost to become FHA certified varies by project because of the varied amount of work involved to prepare all the proper documentation for the certification process.  The decision of whether to undertake this expense lies with the association board of directors and not the individual co-owners. What are the requirements for a community to obtain FHA certification? Below are the key project eligibility requirements which apply to all condominium project approvals per the HUD Mortgagee Letter 2009- 46 B:
  • The project must consist of two or more units.
  • The project must be covered by the proper insurance (flood, hazard, liability, fidelity).
  • No more than 10% of the units can be owned by a single investor.
  • No more than 15% of the total units can be in arrears (more than 30 days past due) in paying the association payments.
  • A minimum of 50% of the units must be owner occupied.
  • At least 50% of the total units must be sold prior to endorsement of a mortgage on any unit.
  • Mortgagees must review the homeowner association budget and determine that the budget is adequate to ensure that sufficient funds are available to maintain the amenities of the community.
  • The community must have a reserve fund which consists of at least 10% of the budget.
  • Only 30% of the total units in a project may hold FHA loans.
  • The community must maintain a reasonable percentage of tenant rentals (20-25%).
  • The co-owners must have insurance coverage for the interior of the unit.
  • Association documents must be in order and comply with HUD and all federal and local laws and regulations.
In accordance with HUD Mortgagee Letter 2009-46 B, FHA certification is not applicable to the following:
  • Condominium Hotel or “Condotels”
  • Timeshares or segmented ownership projects
  • Houseboat projects
  • Multi-dwelling unit condominiums
  • All projects deemed to be used primarily as residential
  • Site condominiums
  • Residential homes
FHA recertification is required every two years. To view the Mortgagee Letter 2009-46 B in its entirety, visit: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-46bml.pdf