The Federal Housing Administration (FHA) recently issued its long-awaited proposed rule regarding standards for condominiums in which individual unit owners are eligible to obtain FHA-insured loans. However, final action awaits review by new housing agency officials in the Trump Administration.
Mortgages backed by the FHA allow borrowers to make a lower down payment and have less stringent financial qualification criteria than conventional mortgages. Of the estimated 150,000 condominium nationwide, fewer than 10,000 are certified for FHA-insured loans.
Since 2010, FHA condo approval standards have been set by administrative policy rather than a formal rule. Although it had been anticipated that the FHA would propose specific standards, the proposed rule largely leaves to future FHA action to establish specific criteria and allows for FHA discretion to grant exceptions to some criteria on a case by case basis.
For instance, the proposed rule would limit the number of FHA-insured condo units to between 25 and 75 percent of the total units in a condominium. Between 25 and 75 percent of the units would have to be owner-occupied, and the amount of commercial/non-residential space would be limited to between 25 and 60 percent of the total floor area.
The proposed rule includes one specific financial requirement–10 percent of the monthly assessments must be allocated to reserves, unless the FHA allows a lower amount for a specific condo based on a reserve study completed in the past 24 months. The rule allows the FHA to later adopt additional standards regarding a condominium’s financial condition, special assessments, and insurance coverage.
For condos which have not obtained FHA approval, the proposed rule would allow “single unit approval” for units which meet less stringent standards to be determined by FHA.
The Community Associations Institute (CAI) has submitted detailed comments to FHA which generally support the existing FHA approval criteria and support single unit approvals. However, CAI urges FHA to adopt clear guidance concerning application of the general approval criteria and how FHA will exercise its discretion to allow exceptions to the general standards.
Separately, the existing FHA condominium approval standards have been extended through August 2017 and remain in effect until changed by a final FHA rule. With the change in leadership at FHA and the Department of Housing and Urban Development in the Administration of President-elect Donald Trump, how and when the condo certification standards will be changed is uncertain.
Posted by Thomas Schild Law Group, LLC, attorneys for condominiums, homeowner associations, and housing cooperatives in Maryland–including Montgomery County, Prince George’s County, Howard County, Frederick County and Baltimore County; and in Washington, D.C.