FHA Opens Door for Condo Loans
Randy Gilbert, J.D.
Chief Happiness Officer
Florida’s Title Insurance Company
(954) 500-Title (8485)
What is the FHA? Created in 1934 to encourage lenders to loan money for single and multifamily homes, the government’s Federal Housing Administration (“FHA”) provides Lenders with “mortgage insurance” to protect Lenders from losses in the event an owner defaults on their mortgage loan. In theory, Lenders bear less risk, and therefore are more willing to loan money, knowing that the FHA will back the loans and repay Lenders their unpaid principal if the mortgage loan defaults. The FHA is self-funded by collecting “mortgage insurance premiums” from borrowers at the closing.
Why Condos are important: Ben Carson, U.S. Secretary for HUD recently recognized that, condominiums are a source of affordable, sustainable homeownership for many families, especially younger first time home-buyers and seniors hoping to age in place; so it’s critical for the FHA to help them obtain loans. With over 150,000 condominium projects, only 6.5% qualified for an FHA backed loan.
New Rules: In order for a Lender to offer an FHA backed loan, requirements established by FHA must be met. FHA’s new Single Family Housing Policy Handbook, Condominium Project Approval (see, pages 510-537) went into effect October 15, 2019, allowing between 20,000-60,000 more units to become eligible for FHA financing.
Eligible condos include: (1) Existing construction; (2) Completed condo; (3) Conversions; (4) two-four unit condominiums; and (5) Manufactured housing.
Ineligible condos exclude: (1) Cooperatives; (2) Condo-hotels; (3) Mandatory rental pooling (ie. pool the rental income with other owners) or give management firms control over the occupancy; (4) Timeshares; (5) Multi-dwelling condo units i.e. more than 1 dwelling per condo unit; (6) Houseboats; (7) Continuing care facilities; or (8) with limited exceptions those in the Coastal Barrier Resource System knocking out many Florida beach condos. Additionally, the FHA may suspend a condominium’s eligibility when more than 50% of the Units obtain FHA insured loans.
Checklist for condos to satisfy FHA’s requirements:
- Owner occupancy for existing Condos should be at least 50%, and 30-35% for newly constructed and completed Condos;
- Be primarily residential in nature;
- Show financial stability;
- Have a reserve account; 15% or less units in arrears;
- Hazard insurance with 100% Replacement Cost for the Condo and individual Units;
- Liability insurance for the common areas of at least $1 Million for any single occurrence;
- Fidelity insurance for condo employees and board (if more than 20 units);
- Flood insurance (if in a Special Flood Hazard Area);
- Subject to exceptions the Commercial/Non-Residential Space must not exceed 35% of the Condominium’s total floor area;
- Not be subject to litigation relating to the condo’s safety, structural soundness, habitability, or functional use;
- If a management company exists, be contractually capable of termination in 90 days or less;
- If a recreational lease exists then it must be under the control of the condo or a non-profit, or terminable in 90 days without penalty;
- Subject to some exceptions not encumber the unit with restrictions in violation of 24 CFR § 203.41 which includes: a declaration of condominium that attempts to cause a conveyance (including a lease) to (i) Be void or voidable by a third party; (ii) Be the basis of contractual liability for breach of an agreement not to convey, including rights of first refusal, pre-emptive rights or options related to efforts to convey; (iii) Terminate or subject to termination all or a part of the interest held in the property if a conveyance is attempted; and (iv) Be subject to the consent of a third party. However, according to Single Family Housing Policy Handbook, Condominium Project Approval (page 528) the Condominium Project’s organizing documents may contain one or more of the following provisions:
- All leases must be in writing and subject to the declaration and bylaws of the Condominium Project.
- The Condominium Association may request and receive a copy of the sublease or rental agreement.
- The Condominium Association may request the name(s) of all tenants including the tenants’ Family Members who will occupy the Unit.
- Unit owners are prohibited from leasing their Units for an initial term of less than 30 Days.
- The Condominium Association may establish a maximum allowable lease term.
- The Condominium Association may establish a maximum number of rental Units within the project; however, the percentage of rental Units may not exceed the current FHA Condominium Project owner-occupancy requirement.
- The Condominium Association may not require that a prospective tenant be approved by the Condominium Association and/or its agent(s), including but not limited to meeting creditworthiness standards.
- The Condominium Association may have the right of first refusal to purchase or lease any Unit only if it does not violate discriminatory conduct prohibitions under the Fair Housing Act regulations at 24 CFR part 100. It is the responsibility of the submitter to address any questions regarding eligibility issues with their attorney or the appropriate agency.”
DISCLAIMER: Not intended to constitute legal advice, accuracy, nor completeness, and may not be relied upon as such; consult an attorney. FTIC is a national award winning title insurance company known for its white glove customer service and “No Junk Fee Guarantee.” ®