Increasing Number of Condominium Projects Eligible for FHA Certification and Recertification through New Federal Law
Approval of Housing Opportunity Through Modernization Act
Through unanimous approval by Congress and then the ultimate approval by the President, the Housing Opportunity Through Modernization Act (the “Act”) potentially opens the door to many condominium associations to obtain FHA certification that were not previously eligible and directs the Secretary of the Department of Housing and Urban Development to streamline the FHA recertification process. Many condominium associations desire to be FHA certified so that condominium units located within the association are available for sale to a much broader pool of potential buyers. In a serious effort to broaden the number of condominium associations eligible for FHA certification, the Act put forth four major changes regarding requirements for FHA mortgage insurance.
- Owner-Occupancy Requirements
The most important change to the FHA certification and recertification process pertains to the possible adjustment of the owner-occupancy requirements from 50% to 35%, thus allowing for many more condominium associations to qualify for FHA certification. The Act requires the Secretary to set the limit on the percentage of units that must be occupied by unit owners whether as principal residences or secondary residences, and include a justification for such percentage requirements. Such guidance must be issued before the expiration of 90 days from the date of the enactment of the law, which was July 29, 2016. Until the 90 day window has passed or the Secretary issues guidance on the owner-occupancy requirement—whichever comes first—the owner-occupancy requirement remains at 50%. It is important to note that the Secretary could conceivably keep the owner-occupancy requirement at 50% based on the plain language of this Act, whether on a national level or applicable to certain regions; however, we believe that to be unlikely especially since the 35% owner-occupancy default requirement has been approved.
Should the Secretary fail to act before the 90-day expiration period, the current owner-occupancy requirement decreases from 50% to 35%. Nonetheless, it is important to point out that should the Secretary fail to act within the 90-day window, the Secretary is still permitted to increase the owner-occupancy percentage on a project-by-project or regional basis, and in determining such percentage factors relating to the economy for the locality in which such project is located or specific to project, including the total number of family units in the project should be considered.
- Project Recertification Requirements
The Secretary is required to streamline the project recertification requirements so that they are substantially less burdensome than certifications. Considerations for streamlining include extending the time between recertifications for previously approved projects and permitting previously approved projects to simply provide select, updated information and documentation. Currently, FHA recertification is almost identical to the rigorous certification process. As such, streamlining the recertification process, or making it more simple, will permit condominium associations from expending a great deal of time in collecting the information and documentation needed for an FHA recertification and potentially saving condominium associations' financial resources in gathering the same.
- Commercial Space Requirements
The Act permits a condominium project to seek exceptions to the nonresidential or commercial floor space requirements, which was previously set at 25% of the condominium project's total floor area. However, FHA was permitted to still consider condominium projects with between 25% to 35% of the condominium project's floor area as nonresidential or commercial space as exceptions, and even condominium projects that had more than 35% floor area dedicated to nonresidential or commercial space could still seek an exception on a case-by-case basis.
Now, the Act requires the Secretary to expound further on what exceptions will be considered to the commercial space requirements, which should include factors relating to the economy for the locality in which the condominium project is located, factors specific to condominium project, and the total number of family units in the condominium project. The Secretary must put forth such guidance within 90 days of the enactment of this Act.
- Transfer Fees
The “transfer fees” section of the Act is not directly applicable to when condominium projects apply for FHA certification approval but rather deal with the financing aspect of mortgages and the information obtained from condominium projects by lenders for the purpose of processing mortgages. Previously, condominium units located within condominium associations that had transfer fees (or fees paid by the buyer and used to fund association operations) were not eligible for FHA-backed loans. Now, the Act does away with such prohibition on transfer fees, and instead requires that the Secretary rely on the less-restrictive standards the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation rely on, which essentially permits condominium associations to have transfer fees so long as they fund association operations.
Why is the Act Important to Condominium Associations?
As discussed above, condominium projects that were not previously eligible for FHA certification may now be in a position to obtain FHA certification approval thanks to the Act. Obtaining FHA certification provides condominium projects 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.
Still Have More Questions or Need Clarification?
Contact Kathleen W. Panagis directly at (703) 280-9268.