FHA Releases More Lenient Approval Guidelines

By: Elizabeth F. Taylor, Esq.

On September 13, 2012, the U.S. Department of Housing and Urban Development released Mortgage Letter 2012-18, instituting several temporary, more lenient guidelines for condominium associations to obtain FHA approval. These new guidelines expire on August 31, 2014, unless extended or superseded. According to the FHA, these new guidelines were adopted to address current housing market conditions.

Generally, a condominium association must apply for and obtain FHA approval from FHA for the condominium project as a whole in order for the FHA to insure loans on condominium units within the development. The new, more relaxed requirements established by Mortgage Letter 2012-18 should make it easier for condominium developments to become FHA approved and thereby make it easier for individuals to buy, sell, and refinance condominium units. Significant changes to the FHA guidelines include the following:

Delinquency Rate. Previously, the FHA Guidelines provided that no more than 15% of the total units within a condominium could be more than 30 days delinquent in their assessment payments. The new guideline contained in Mortgage Letter 2012-018 provides that no more than 15% of the total units within a condominium can be more than 60 days past due in their assessment payments. The new guideline also clarifies that delinquent assessment payments do not include late fees or other administrative expenses.

Ownership and Occupancy. Under prior guidelines, no more than 10% of the units in the project could be owned by a single investor. The new requirements, however, allow for greater investor ownership. Now, for existing condominiums, a single investor may own up to 50% of the total units within a condominium if the other 50% of the total units have been sold or are under contract to an owner-occupant principal residence purchaser. Further, any unoccupied and unsold units owned by the developer are not counted as investor owned unless the developer owned unit is presently rented or has previously been occupied.

Non-Residential/Commercial Space. Per the previous guidelines, generally no more than 25% of the space in a condominium project could be designated for non-residential/commercial use, and exceptions to this general rule could only be considered for commercial space up to 35% (an additional 10%) of the existing floor space of the condominium. The new guidelines allow for greater commercial space in existing condominiums. Pursuant to Mortgage Letter 2012-018, case-by-case exceptions may be granted for condominiums having up to 50% commercial space. To qualify for this exception, a condominium association must show that the commercial space does not have a negative impact on the residential character of the condominium project. This means that, at least for now, mixed-used condominium developments with office, retail, and other types of non-residential space have a better chance to become eligible for FHA approval.

Project Certification. The new Project Certification form required to be executed as part of any submission for FHA approval is less onerous than before. The new FHA guidelines only require that the individual signing the Project Certification attest as follows: “(1) To the best of my knowledge and belief, the information and statements contained in the condominium project application are true and correct; and (2) I have reviewed the condominium project application and in reliance upon advice given by my attorney, it meets all State, and local condominium laws; and (3) I have reviewed the condominium project application and it meets all current Federal Housing Administration (FHA) condominium approval requirements; and (4) I have no knowledge of circumstances or conditions that might have an adverse effect on the project (including but not limited to defects in construction; substantial operational issues; or litigation, mediation or arbitration issues).”

Overall, the recently released FHA guidelines should facilitate more condominium associations applying for and obtaining FHA approval, which in turn should aid the buying, selling, and refinancing of condominium units. If your condominium association is interested in learning about the FHA approval process, please contact Winter Capriola Zenner, LLC. We are here to help.

To review the complete version of Mortgage Letter 2012-18 issued by the U.S. Department of Housing and Urban Development please go to http://portal. hud.gov/hudportal/documents/huddoc?id=12-18ml.pdf.