The FHA Revises Condo Qualifications
In the past, condominium financing from the FHA was fairly loose. A 3.5% down payment was all that was needed. During the recession, the FHA was caught off guard with the number of complications experienced by many condo associations.
These loosely managed associations fell far short of the requirements detailed in the group’s prospectus. As a result, many new purchasers were surprised to find they were liable for previously unpaid condominium fees or that they had invested in associations that were not fiscally responsible.
Effective February 1, 2010, the FHA has added stipulations for associations that expect FHA approved loans. The new requirements mandate associations to be fiscally responsible and solvent before the FHA will approve a development. The down payment will remain 3.5% but only associations that comply with the new guidelines will be eligible for FHA loans.
These guidelines will protect purchasers and should actually serve as benefits to condo associations who meet the standards. To qualify for FHA approval, associations are now required to:
· Maintain a cash reserve equal to 10% of the annual budget
· Adopt as policy a standard assuring that no more than 15% of its owners are more than 30 days late with condominium dues
· Allow potential lenders access to financial and insurance policies
· Assure that one investor cannot own 10% of the units within the association
· Fidelity insurance must be purchased for associations with more than 20 units
· A maximum of 25% of the condominiums may be used for commercial space
Fannie Mae revised its FHA lending practices in 2009. The two agencies have put pressure on condominium associations to bring their financial houses in order. Condominium boards need to establish adequate reserves, comply with collection policies to reduce delinquency rates and to apply sound, audited bookkeeping.
Failure to comply will eliminate the possibility of FHA and Fannie Mae financing. Before investing in a condominium association, make sure the association c0mplies with the FHA terms.