FHA Condo Announcement Brings Good and Bad News
First, the bad news: An FHA Mortgagee Letter released this month limits to 30% the number of units in an FHA-approved condo project that may be financed using FHA-insured mortgage loans. A similar requirement has been in place for years concerning units in non-approved projects. Applying the 30% concentration limit to FHA-approved projects would have an extremely negative impact on condo sales, since many current buyers are turning to FHA-insured loans in the current economy. Such an action would cripple the already-wounded condo market.
NAHB expressed this concern to FHA staff when the Mortgagee Letter was issued. In addition, NAHB members and staff will be soon be meeting with FHA staff to voice the concerns which have been expressed by many members and to discuss alternatives that would facilitate FHA-insured financing for condo units while continuing to protect FHA’s insurance fund.
And the Better News
The Mortgagee Letter makes a number of other changes, many of which will be positive for condo developers. For example, beginning on Oct. 1, a building permit and certificate of occupancy from a jurisdiction that performs at least three construction inspections will eliminate the need for the condo units to be covered by a 10-year warranty. For other jurisdictions, the warranty requirements would be waived if a lender issued an “Early Start” letter and the property has been inspected by an FHA-approved inspector.
FHA’s announcement also confirms that 50% of the units must be owner-occupied and that 50% of a project’s or phase’s units must be sold before loans can be closed. While this hurdle may present challenges in many of today’s markets, it is easier to comply with than Fannie Mae’s and Freddie Mac’s presale requirements, which can be as high as 70%.
Another significant policy shift is the option that will grant project approval authority to approved lenders. Under this authority, lenders who approve a condo project would warrant that the project conforms to FHA’s requirements.
Additional Changes
The same Mortgagee Letter eliminates the requirement for developers of single-family communities to seek approval for projects that are being developed as “site condos.” It has been common practice for years in Michigan, and to a lesser degree elsewhere, to develop single-family subdivisions as site condominiums. In the past, developers often did not seek FHA’s approval for these projects for a number of reasons, most of which deal with technicalities. The lack of FHA’s approval did not become an issue until the mortgage market turned upside down in 2007, however, making conventional loans harder for home buyers to obtain. Changes in the housing laws in 2008 opened the door for FHA to treat site condo developments the same as other single-family developments, which have not required FHA approval for many years. NAHB had been pressing FHA to make this change since the site condo issue began to surface in early 2008. This change was effective upon issuance of the June 12 Mortgagee Letter.
View the Condominium Approval Process Mortgagee Letter
For more information, e-mail Bill Renner, or call him at 800-368-5242 x8597.
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