New FHA rules loosen association requirements
Pamela Dittmer McKuen / Chicago Times / September 27, 2012 / link
|The Department of Housing and Urban Development has loosened its requirements for association approval. (Heather Charles/ Chicago Tribune photo / May 22, 2012)|
Greater numbers of condominiums now qualify for mortgage financing insured by the Federal Housing Administration. That’s because this month the U.S. Department of Housing and Urban Development, which oversees the FHA, loosened its requirements for association approval.
The entire association must be FHA-certified before the agency will agree to back a loan on a single unit.
“The new requirements will make it easier to buy, sell and refinance condominium units,” said Steve Stenger, president of Condo Approval Professionals LLC in Lake in the Hills. “The real estate market in Chicago is better than in many areas of the country, but there is still a lot of recovery that needs to be going on.”
FHA loans are extremely popular because qualified buyers can own a home for as little as 3.5 percent down. Conventional mortgage lenders typically require a 20 percent down payment. If an association does not have FHA approval, would-be sellers lose out on a large pool of prospective buyers.
“We’re seeing fewer and fewer people putting 20 percent down with traditional loans,” said association attorney Lara Anderson of Fullett Rosenlund Anderson PC in Lake Zurich. “Even if they have it, they don’t want to spend it. Why should they if they can put less down?”
The new requirements are detailed in HUD’s Mortgagee Letter 2012-18, dated and made effective Sept. 13, 2012. They include changes in assessment delinquency rates, investor ownership and commercial space limitations.
Perhaps the most significant change is a liberalized policy on delinquencies: No more than 15 percent of the total units can be more than 60 days past due on assessment payments, not including fees and fines. The previous threshold was 30 days past due.
“The delinquency rate was the biggest hurdle holding back many associations from qualifying for approval,” said Anderson. “Thirty days is not a lot of time. When market conditions are good, people usually pay their assessments on time. But in this economy, it’s a fact of life that people are paying later and later.”
Stenger said the change also will benefit associations whose certifications are up for renewal, especially those who barely made the 30-day limit the first time and whose delinquencies have gotten longer since then. Certifications are granted for two-year periods.
Another major change permits greater investor ownership. In existing associations or nongut rehabilitation conversions, an investor may own up to 50 percent of the total units if at least 50 percent of the total units have been sold or are under contract. Unoccupied and unsold units owned by a developer are not counted as investor owned unless the units are currently rented or were previously occupied.
Previously, no single entity could own more than 10 percent of the units or one unit, whichever was greater.
“The investor ownership issue typically occurs in smaller associations or in situations where a bank is servicing multiple (foreclosures) and is now in possession of more than 10 percent of the units,” said Stenger. “It also happens when a developer has a hard time selling all the units and becomes an investor renting them out. Now all these associations are eligible when they weren’t before.”
Still another change allows for greater commercial enterprise in existing associations. The baseline amount of the total floor area that can be used for commercial purposes is capped at 25 percent. Under the new requirements, case-by-case exceptions may be made for associations whose commercial space measures more than 25 percent and up to 50 percent of the total floor area.
In the past, such exceptions could be made for associations whose commercial space measured more than 25 percent and up to 35 percent.
The commercial space cannot have a negative impact on the residential character of the project. Additional documentation and photographs must be submitted for review.
“Now mixed-use developments with office and retail space that didn’t qualify are eligible for approval provided they meet the extra requirements,” said Stenger.
Other changes cover employee dishonesty insurance, presale requirements for new construction and a revised project submission form. The revisions will apply at least until Aug. 31, 2014.