What is FHA as it Relates to Condominium Associations: Pros and Cons
Since 2010, the FHA has required that entire condominium associations be certified before granting FHA backed loans to home buyers. Prior to 2010, the certification was only required for the individual unit. Condominium associations considering FHA certification must understand the FHA organization and what constitutes eligible projects. Equally important is understanding the truth regarding common FHA misconceptions.
FHA stands for the Federal Housing Administration. It is the government-owned insurance company that insures home loans for buyers who can't afford a conventional down payment or who choose to use their funds in other ways. FHA backed loans allows home buyers to purchase a home with a lower down payment and often with a lower interest rate. The lower down payment requirements attract new home buyers.
FHA, Condominium Associations, and Certification
The FHA requires an entire condominium project to be FHA certified before certifying loans. In other words, no single unit is eligible for FHA financing unless the entire condominium community is FHA certified.
- Only condominium communities are eligible for FHA certification.
- Condominium projects must consist of two or more units.
- Projects must be 100% built-out (completed construction) and over one year old.
- Phased condominium units must have phase one completed and be over one year old
- Each condominium project must exist in compliance with state and local laws.
- Condominium hotels
- Multi-dwelling units
- Projects not using units for primarily residential use
- Projects where more than 25% of total space is used for non-residential use
- Assisted living facilities
- Projects located within designated coastal barriers of the Atlantic Ocean, the Gulf of Mexico, and the Great Lakes.
- Projects where the developer still owns a common area or amenities after transfer of ownership to the association.
When applying for certification, a condominium association must make certain declaration statements relating to certification requirements. These statements must be submitted on company letterhead and are often signed by an attorney. The condominium management team may sign the document themselves, however, it is highly recommended an attorney review it first. An attorney is helpful when reviewing the required FHA guidelines and the association's application. The declaration document certifies, among other things, that the information submitted in the application is true to the best of the sender's knowledge. Serious penalties exist for signors who knowingly provide false information. Maximum penalties under federal law regarding this include a possible 30-years imprisonment and a $1 million fine. The penalties for knowingly providing false information underscores the importance of seeking attorney assistance with the certification document.
The Pros and Cons of FHA Certification
For condominium associations considering the FHA certification process, do the pros outweigh the cons? Most industry experts say yes. The biggest hurdle between associations and certification is the misconception that the FHA attracts low-income buyers. This conception is 100% false as the FHA is not associated in any way with affordable housing programs. Another misconception is that the FHA is a lenderwhen in fact, the FHA provides mortgage insurance to banks, credit unions, and other lenders. Here are a few key reasons why industry experts rate FHA certification as a pro-choice:
- Buyer pool increases- With 60% of new home buyers shopping with an FHA backed loan, the buyer pool increases for those condominiums with certification.
- More buyers + higher demand = higher property values for all units within the community.
- Realtor showings increase-realtors are more likely to bring clients to FHA certified properties. Units within these properties often sell faster and for higher than units in non-certified properties.
- Homeowners vs. Renters-First time home buyers tend to actually live in their unit, unlike investors who choose to purchase and rent units.
Two methods exist for the certification process:
- HRAP-the HUD review process (the process most used by associations)
- DELRAP-the direct endorsement lending and review approval process
The FHA certification process for condominium associations requires strict attention to the guidelines and requirements. Once completed, associations stand a better chance at an increased pool of home buyers and an increase in property values. To better understand FHA certification for condominium associations, contact us today for more information.