Condo Financing Made Even More Difficult

Condo Financing Made Even More Difficult

FHA announced that it will put new requirements into effect for condominium financing. As of the writing of this article, the new requirements were schedules to take effect October 1, 2009. However, there was talk of delaying enactment until November 2009 to facilitate closing of first time home buyer tax credit transactions. Buyers should consult with their lender to determine whether the regulations will impact their purchase efforts.

In some cases, the new requirements will eliminate FHA loans to entire condo projects while for others, it will make the process of obtaining an FHA loan considerably more difficult and time consuming.

FHA financing will still be available for condo projects that are existing, conversion, under construction and manufactured housing condominium projects. All of these various types of condo projects have their own rules and requirements. For the most part, this article will focus on the eligibility requirements for existing condo projects, which are applicable to other forms of condo projects as well. It should be understood, however, that the other types of condo projects have additional conditions and may require different interpretations of the same requirements (such as occupancy requirements for projects that are still under construction). Finally, single family detached dwellings that are encumbered with condominium CC&Rs are not affected by these new regulations.

With the new requirements, the SPOT loan approval process was eliminated. Now, before any units within a condo complex may be sold with FHA financing, the complex must receive approval directly from HUD or from a Direct Endorsement Lender with knowledge and expertise in approving condo projects, Condominium projects can be pre-approved and will remain on a “pre-approved” list for two years from certification. Time may prove that the condo complexes with pre-approval were the projects that best held their value and actually allowed sellers to reach closing. Condo associations may be able to provide a valuable asset to members by seeking pre-approval from HUD.

The following conditions are among those that must be avoided or mitigated. It is unclear how these conditions can be mitigated so if any of these conditions exist in a condo project, the parties should understand that these conditions will likely affect the availability of FHA financing.

· The project is located in Special Flood Hazard Area.

· Potential noise issues if the condo project is located within 1000 feet of a heavily travelled road, 3000 feet of a railroad, one mile of an airport or five miles of a military airfield.

· Property is located within 3000 feet of a landfill or any property that is a Superfund site or is the subject of a Phase I Environmental audit indicating a Recognized Environmental Condition or recommending further assessment for the presence of contaminants.

· Location within a historic district listed on the National Register of Historic Places.

Following are some of the eligibility requirements that apply to existing condo project approvals. If the condo project fails to satisfy any of these requirements, then presumably, FHA financing will not be available for any units within the project.

· No more than 25% of the project’s total floor area may be used for commercial purposes.

· No more than 10% of the units may be owned by one investor. For two or three unit projects, no more than one unit may be owned by the same entity.

· No more than 30% of the units in the project may be encumbered with FHA financing. For two or three unit projects, no more than one unit may be encumbered with FHA financing.

· No more than 15% of the total units may be delinquent in payment of association dues.

· At least 50% of all units must be sold prior to endorsement of any unity.

· At least 50% of all units must be owner-occupied or sold to owners who intend to occupy the unity.

· A current reserve study must be performed to ensure that adequate funds are available for capital expenditures and maintenance. A current reserve study is no more than 12 months old and is updated if conditions have changed.

These new and revised regulations will have a dramatic affect on the availability of FHA financing for condominiums. Condo buyers who are relying on the availability of FHA financing must be certain to build sufficient time into their closing dates to insure project approval for the condo project. Condo owners who are marketing condo units, or thinking about marketing their unit in the future, would be wise to look into the possibility of obtaining the FHA pre-approval for their condo project. For condo units that are in a price range where FHA financing is a likely choice for buyers, FHA pre-approval could be the difference that draws a buyer to seller’s unit rather than another condo project where FHA approval is uncertain at best.

The preceding is an opinion from Annie Fitzsimmons, the attorney who answers questions for the Washington Association of REALTORS® Legal Hotline. The Legal Hotline lawyer does not represent Washington Association of REALTORS® members or their clients and customers. For additional questions or information, please contact Jen at (206) 293-1005 or send me an email to jen@jenhudsonhomes.com.