October 7, 2009
Beginning, October 1st, the FHA has instituted new rules around loans on condos. The full letter is embedded below. The new rules are pretty dramatic, particularly for new condo and vacation-unit developments seeking FHA approval. The rules require at least 50% of the units in the project to have been sold for new product, and completely drops projects which are not intended to be primary residences. Additionally, consider the fact that the FHA guaranteed about 25% of the mortgages made in the United States this year.
The requirements, some of which are detailed below, are part of an effort by the FHA to reduce risk. Just look at some of these rules:
- First projects which are no longer eligible at all:
- Condominium Hotels (this was a stupid concept to begin with)
- All projects not deemed to be used primarily as residential
- Now look at one of the conditions the lender has to “avoid or mitigate” against:
- Potential noise issues, where the property is located within 1000 feet of a highway, freeway, or heavily traveled road, within 3000 feet of a railroad, or within one mile of an airport or five miles of a military airfield.
- And finally, look at some of the requirements that pertain to Condominium Project approvals:
- No more than 25 percent of the property’s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogenous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
- No more than 10 percent of the units may be owned by one investor. This will apply to developers/builders that subsequently rent vacant and unsold units. For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete; and only one unit can be conveyed to non-owner occupants.
- No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
- At least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. Valid presales include an executed sales agreement and evidence that a lender is willing to make the loan.
- At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies). Secondary residences can only be included if it meets the requirements of 24 CFR 203.18(f)(2). If the owner-occupancy ratio includes presales, FHA requires an executed sales agreement and corresponding evidence that a lender is willing to make the loan and the buyer intends to occupy the unit. A separate owner-occupancy certification is also required in the FHA case binder for loans where the Individual Condominium Unit Appraisal Report, Fannie Mae Form 1073, does not contain the required data or the condominium project is proposed or under construction.
- In addition, projects can have no more than 30% of the total units encumbered with FHA loans. Also a reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance.
A current reserve study must be no more than 12 months old – if recent events or market conditions have affected the finished condition of the property that information must be included. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed.
What’s more is that any condominium development approved prior to October 1, 2008 loses its FHA approval and must formally re-apply. That applies to a lot of projects, including I presume, many of those in various levels of distress around the valley.
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