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FHA Certification of Condominium Associations
The Federal Housing Authority (FHA), is a government agency that does not loan money. The FHA insures loans for buyers who cannot afford a conventional down payment. FHA insured loans now amount to more than half of all new home loans. With an FHA insured loan, buyers can obtain:
- Low down payments (3.5% of the purchase price as opposed to 20% for conventional loans),
- Easy credit qualifying,
- Low closing costs, and
- Loans up to $625,000. (subject to change).
As of February 1, 2010, the FHA stopped providing spot approvals and now requires that condominium projects become approved as an entity. FHA certification applies to condominium projects not planned developments. To qualify for an FHA insured loan, condominiums must be in a common interest development that has been “certified” by the FHA. Certification of the project means the association meets guidelines established by the FHA which it believes will reduce the risk of default on home loans insured by the FHA in that project. Once the association has been certified, buyers of condominiums in the project can apply for FHA insured loans. Certification does not mean buyers automatically receive FHA insured loans, they must still qualify as buyers.
FHA certifications are effective for three years, at which point they expire. Condominium boards should begin the recertification process before the expiration so as to avoid gaps. Recertification can begin up to six months prior the expiration date. Unless the association’s governing documents provide otherwise, a board of directors has no statutory duty to seek certification for their associations. Following are some of the FHA requirements for certification. Check the FHA website for updates that are made from time to time:
- At least 50% of the units must be owner-occupied.
- No entity may own more than 10% of the units.
- Reserve contributions must be at least 10% of the budget.
- No more than 15% of the units may be more than 60 days delinquent.
- The project must meet certain insurance coverage and deductible requirements.
- If the condominium is in a flood plain, it must meet certain requirements established by FEMA.
- A maximum of 25% of the development’s floor space may be commercial.
- No more than 30% of the owners may currently have FHA insured loans.
- Employee dishonesty insurance coverage is required for associations of 20 units or more in size.
- Condominium projects with up to 35% commercial space must go through the HUD Review and Approval Process (HRAP).
For more information and recent updates, see FHA the Mortgage Condo Approval Guide on their website. Standards vary for associations still under developer control and for condominium conversions. To find out if your association has FHA approval, go to the FHA website.
FHA documentation requires an authorized association representative to certify that:
- To the best of their knowledge and belief, the information and statements contained in the condominium project application are true and correct.
- They have reviewed the condominium project application and it meets all current Federal Housing Administration (FHA) condominium approval requirements; and
- They 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).
After a commercial bank makes FHA-insured loans, it can sell them to Fannie Mae. Non-FHA insured loans can be sold to Freddie Mac.
Condominium associations are required to disclose annually whether or not the association is FHA and/or VA certified.