Expanding the Marketability of Units in your Condominium Association to a Bigger Pool of Potential Buyers: FHA Certification and Recertification
What Does it Mean for a Condominium Project to be FHA Certified?
When a condominium project is FHA certified, it means that the units located within the condominium project are eligible for FHA-insured loans. An FHA insured loan is a Federal Housing Administration (“FHA”) mortgage insurance backed-mortgage loan, which is tied to an FHA-approved lender. In other words, FHA does not issue loans; rather it insures loans from private lenders.
Obtaining FHA certification provides condominium associations with the ability to have their units sold to FHA approved buyers, which is not only an attractive benefit buyers seek out but also permits selling unit owners to market their units to a greater pool of potential buyers. The FHA program permits buyers to put down as little as 3.5% as opposed to the typical 20%. The lower down payment attracts many first-time buyers, who still must meet separate FHA approval requirements on their own.
No single unit can receive FHA finance or refinance unless the entire condominium project is approved. The old days of “spot approval,” where an individual unit could receive its own FHA approval, have been long gone. A condominium project can receive certification issued by either an FHA staff member through the HUD review and approval process (also known as HRAP) or by an FHA-approved mortgagee through the direct endorsement lender review and approval process (also known as DELRAP). The HRAP option is by far the most common, and this is the where the condominium association through its managing agent, board of directors, project consultant, and/or attorney prepares the certification application by answering all questions listed on HUD's certification cover letter/document and providing all requested documentation. Individual unit owners are not permitted to submit FHA certification or recertification applications to HUD.
What Does FHA Recertification Mean?
FHA certification must be renewed every two years. The phrase “recertification” means re-providing HUD with updated information and documentation similar to what was provided two years prior to ensure the condominium project is still compliant with FHA's eligibility requirements and that no conditions currently exist which would present an unacceptable risk to FHA. It is important for condominium associations to monitor the expiration date since HUD will not send notification regarding a condominium association's pending certification expiration date.
Condominium projects that have their FHA certification expired can apply for recertification no later than six months from the date of the certification expiration. To prevent any lapse in FHA certification, condominium associations can apply for recertification no earlier than six months before the expiration date. In the event there is a lapse—whether within the six month window from the certification expiration date or thereafter—the certification process is almost identical to the recertification process.
What Information and Documentation is Needed?
Both the FHA certification and recertification process require condominium associations to provide an exhaustive list of information and documentation to FHA in order to determine whether the condominium project is eligible for FHA certification. A sample of the information and documentation required to be included in an FHA certification or recertification application includes the following:
- Copy of recorded governing documents;
- Current budget;
- Copy of current balance sheet showing the condominium association's reserve account balance;
- Copy of previous year-end's results (i.e., income and expense statement);
- FEMA flood map showing the condominium project's zone indicator;
- Copy of the condominium association's current management contract;
- Disclosure of the condominium association's delinquency rate, which no more than 15% of the total units within the condominium can be sixty days or more past due in the payment of assessments;
- Investor-to-owner ratio, which no more than 50% of the total units within the condominium can be investor-owned/tenant-occupied (the new requirements pertaining to this information are discussed in the next section);
- Copy of the association's certificate of insurance, including proof of its fidelity bond coverage, which must be in the amount of three months' worth of assessments plus the current reserve balance, unless otherwise required by statute;
- Information pertaining to special assessments, if any; and
- Explanation of pending litigation involving the condominium association and/or its board of directors, if any.
It is important to note that the above list is not exhaustive and there may be additional explanations condominium associations must provide to HUD in its application based upon what is reflected in the above information and documentation. For example, if a condominium association's previous year-end results show that it suffered a loss, HUD will more than likely require the condominium association to explain why the loss occurred and what the condominium association is doing in its current fiscal year to address such prior loss.
New Certification and Recertification Requirements Per Mortgagee Letter 2015-27
The eligibility requirements as well as the list of information and documentation listed above come from FHA's Mortgagee Letter 2011-22 and its Condominium Project and Approval Processing Guide, Mortgagee Letter 2012-18, Mortgagee Letter 2014-17, and Mortgagee Letter 2015-27—all of which are on HUD's online portal. These mortgagee letters should be consulted when determining whether a condominium association may qualify for FHA certification, and what information and documentation will be needed in addition to what is briefly discussed above.
The most recent Mortgagee Letter 2015-27 issued three temporary provisions in hopes of increasing the pool of condominium projects eligible for FHA approval, which pertained to owner-occupancy requirements, insurance requirements, and recertification requirements. No other changes to other eligibility requirements were made.
First, in regards to owner-occupancy requirements, HUD clarified that the phrases principal residence and secondary residence have the same meaning in terms of calculating the owner-occupied and investor-owner/tenant-occupied ratio. Specifically, a secondary residence is dwelling that the owner occupies in addition to his/her principal residence, but less than a majority of the calendar year. Secondary residence, however, does not include a vacation home. This now allows units that are secondary residences to not be considered as investor-owned towards the maximum number of units that may be investor-owned/tenant-occupied. In addition, condominium associations must now provide a “data source” showing how it calculated its owner-occupied units versus investor-owned/tenant-occupied units. This data source can include what is contained in the mortgagee's required resale disclosure statement or management's onsite versus off-site address information.
Second, as previously required, all condominium associations are required to maintain adequate master or blanket property insurance in an amount equal to 100% of current replacement cost of the condominium exclusive of land, foundation, excavation and other items normally excluded from coverage. Now pursuant to Mortgagee Letter 2015-27, the requisite insurance coverage can consist of pooled policies for affiliated projects, state-run plans, or coinsurance obligations on part of the policy holder.
Lastly, for all FHA-approved condominium projects eligible for recertification, Mortgagee Letter 2015-27 now requires that a recertification checklist be also submitted in addition to all other required information and documentation. The recertification checklist is a two-page document that looks similar to the cover document condominium projects must have completed for both FHA certification and recertification applications.
Still Have More Questions or Need Clarification?
Our office will be hosting a lunch seminar on Wednesday, February 10, 2016 at 12 p.m. to discuss the FHA Certification and Recertification Process including the newest requirements put out by HUD in November 2015. Sample FHA certification and recertification application binders will be available for review. Please contact events@wtplaw.com to reserve your spot today. We will accept your RSVP through Monday, February 8, 2016.