With the recent upswing in the housing market after enduring more than five years of the Great Recession, home buyers looking to buy a condominium have more than the size of their down payment and credit score to worry about. The condominium project and its association of condominium owners must pass a test as well.
Lenders follow guidelines from the Federal Housing Administration (“FHA“), Fannie Mae and Freddie Mac for condominium mortgage eligibility. Condominiums that are not approved for FHA, Fannie Mae or Freddie Mac financing are known as “non-warrantable” and offer fewer options for buyers or refinancers who need to take advantage of the programs those three organizations can provide, not only to first-time home buyers but also to others who prefer to take advantage of the benefits such programs offer. However, while some variations exist between the three programs, they generally require the following:
- More than half of the condominium units must be owner-occupied.
- No owner may own more than 10 percent of the units.
- No more than 15 percent of the owners can be delinquent in the payment of condominium dues and assessments.
- All amenities must be completed if the development is more than 12 months old.
The FHA may have friendlier down-payment requirements, but it has strict guidelines for condominium associations. In order for a given condominium to be approved for an FHA home loan, it must be on the FHA’s list of approved condominium projects, which can be accessed here.
In September 2012, in an effort to address some of the regulations that may have been overly restrictive, the U.S. Department of Housing and Urban Development issued Mortgage Letter 2012-18, which provided temporary approval provisions for the FHA Condominium Approval Process. While the FHA distinguishes between existing condominiums (and between newly converted gut and non-gut rehabilitations) generally, the following provisions apply in each instance.
Some of the requirements for a condominium association to be approved for FHA-guaranteed mortgages are the following:
Association Finances. The condominium association’s financial documents, consisting of the budget and operating results, must evidence that the allocations and line items are sufficient to maintain and preserve all the amenities and features unique to the condominium project. Furthermore, the budget must provide for funding replacement reserves for capital expenditures and deferred maintenance in an amount representing at least 10 percent of the budget, as well as providing for adequate funding for insurance coverage and deductibles. Furthermore, the budget must indicate that there are sufficient funds on hand to fund any reserve study or engineer’s report that identifies needed replacements within the next five-year period.
Delinquent Condominium Association Dues. No more than 15 percent of the total units can be in arrears (more than 60 days past due) on their condominium association fee payments. The 15 percent includes all units — occupied, investor, bank-owned and vacant.
Owner-Occupancy Requirements. On existing projects, (fully completed and over one year old or non-gut rehab conversions), at least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. The owner-occupancy percentage must be documented with copies of sales agreements and loan commitments, evidence that the units have closed and are occupied, or information from a developer that lists all of the units already sold, under contract or closed that is accompanied by a signed certification from the developer.
A secondary residence can only be considered “owner-occupied” if it meets additional requirements. A secondary residence means a dwelling where the mortgagor (owner) maintains or will maintain a part-time place of abode and typically spends (or will spend) less than a majority of the calendar year; which is not a vacation home; and which has been determined to be eligible for insurance in order to avoid undue hardship to the owner. A person may have only one secondary residence at a time. Additionally, a unit sold to an owner who intends to occupy the unit may be considered “owner-occupied” only if it was a valid presale.
Investor Ownership. A unit occupied as a principal residence is not considered an investment property. For all existing or non-gut rehab projects, any investor/entity (single- or multiple-owner entities) may own up to 50 percent of the total units at the time of project approval if at least 50 percent of the total units in the project have been conveyed or are under a bona fide contract for purchase to owner-occupant principal residence purchasers. Unoccupied and unsold units owned by a builder/developer are not considered as investor-owned and subject to the requirements unless the unit is currently rented or has previously been occupied.
Insurance Requirements. For all new and established projects with more than 20 units, the condominium association is required to obtain and maintain hazard, liability and—where the property is located within the 100-year flood zone—flood insurances. Some of the specific requirements are as follows:
- Hazard (Property) Insurance. The condominium association is required to obtain and maintain adequate “master or blanket” property insurance in an amount equal to 100 percent of current replacement costs of the condominium development, exclusive of land, foundation, excavation and other items normally excluded from coverage.
- Liability Insurance. The condominium association is required to maintain comprehensive general liability insurance covering all of the common elements, commercial space owned and leased by the owners’ association and public ways of the condominium.
- Fidelity Bond/Employee Dishonesty Insurance. For all new and established projects with more than 20 units, the condominium association is required to obtain and maintain fidelity bond or fidelity insurance (also sometimes known as employee dishonesty insurance) for all officers, directors and employees of the association and all other persons handling or responsible for funds administered by the association. The coverage must be in an amount not less than a sum equal to three months’ aggregate assessments on all units plus reserve funds unless the state law mandates a maximum dollar amount of required coverage. If the condominium association engages the services of a management company, that management company is to also maintain similar insurance coverage for its officers, employees and agents handling or responsible for association funds.
- Flood Insurance. If the condominium project is located within a 100-year flood zone, the condominium association is required to obtain and maintain coverage equal to the replacement costs less land costs or up to the National Flood Insurance Program standard of $250,000.00 per unit, whichever is less.
- Owner-Required Insurance. In order for the condominium property to be FHA-eligible, the unit owner is required to obtain a “walls in” property coverage policy if the master or blanket policy does not include interior unit coverage, including insuring upgrades the unit owner may have made to his or her particular unit.
Condominium owners may ask their association or management company if their complex is FHA-approved, and if not, request that such approval be obtained to the benefit of everyone. That approval can increase the value of all of the units within the condominium project, which is obviously a benefit to everyone.