FHA’s New Rules Impact Condo Sales

As many who follow our industry may be aware, the Federal Housing Administration (FHA) has been in the news recently regarding a number of “rule changes” to FHA loan underwriting criteria and procedures. Two of these changes will have a significant impact on condominium associations. These new rules relate solely to condominiums and will not affect other associations at this time.

First is the requirement that as of February 1, 2010 all condominium associations must have their own “FHA certification” in place (as opposed to lenders submitting spot loan applications). Second is the requirement that all condominium associations have their FHA certification renewed every 24 months, even those with current FHA certification in place. FHA underwriting is required to allow owners/buyers to qualify for FHA loans.

Why should board members care about FHA certification for their community? FHA provides an insurance policy to mortgage companies. If a borrower defaults on the mortgage, FHA will cover some or most of the loss the lender would suffer. Mortgage companies like to work with FHA because they can require a lower down payment (less than 20%) than conventional financing and therefore qualify more borrowers, which results in more profit for the mortgage company. At the same time, lenders worry less about their investment in the home/unit because if the borrower defaults, FHA will pay a significant percentage of the balance of the mortgage.

Regarding the question of “is FHA Certification desirable”, the answer most commonly heard from management companies, lenders, attorneys, realtors, sellers and buyers, is yes, in that it is desirable to attain and maintain FHA certification to ensure owners and buyers have the full complement of financing options available to them. Given the challenging nature of the marketplace, FHA certification can be essential for many buyers/sellers.

Regarding the question, “what is the best method for an association to acquire FHA certification”, there are a number of varying opinions from association attorneys, lenders, sellers and buyers as to the responsibility and strategy a condominium board should consider in regards to FHA certification. There are two options for acquiring FHA certification:

Do nothing as an association and let others, such as lenders, try to get the FHA certification for your association. (Officially called the DELRAP process). In this process the lender is the official applicant for your community and controls the process.
As the association, apply for the FHA certification. (Officially called the HRAP process). In this process the association is the official applicant and controls the certification process.

From the perspective of most who have analyzed these options, the best argument heard for the DELRAP process is that the lenders will take care of the certification process for the association because they will need the certification in order make more loans in your community. The best argument heard for not allowing the lenders to try to gain the FHA certification for the association is that they may do a substandard or unacceptable job, jeopardizing the ability of the association to attain its FHA certification. The argument for the HRAP approach is based on the logic of “the association having direct control of the outcome by taking control of the process.”

As a side note, all FHA certifications will require re-certification every 24 months and the rules for the re-certification procedures have not yet been fully established.

To determine the status of your association, the FHA web site provides a list of all condominium associations that are currently listed in the system. If your association is not listed, it would indicate it has not been submitted for FHA certification.

Mark Lewis
AMS®, CMCA®, PCAM®
Executive Vice President -
Development & Strategic Planning
Associa
Tucson, AZ