New Law Affects FHA Requirements for Condominium Financing

Ballard Spahr LLP

Ballard Spahr LLP

President Obama signed the Housing Opportunity Through Modernization Act (H.R. 3700) into law on July 29. Title III of the Act will significantly modify Federal Housing Administration (FHA) condominium mortgage insurance requirements involving (1) the recertification process, (2) commercial space ratios, (3) transfer fee restrictions, and (4) owner-occupancy minimum ratios.

Unless a condominium project is certified by the FHA, no unit may be purchased using an FHA-backed loan. Currently, condominium projects must be recertified every two years, requiring submission of voluminous documentation to the FHA. The Act directs the Secretary of the U.S. Department of Housing and Urban Development (HUD) to streamline the recertification process to make it “substantially less burdensome” by considering lengthening the time between certifications and allowing for updating of information rather than resubmission. The Act does not specify the time period for recertification or enumerate required documentation.

The Act also simplifies the process for requesting exceptions to commercial space ratios. Current FHA requirements limit non-residential commercial space to 25 percent of a condominium project, and requests for exceptions must be submitted to the HUD national office. The Act revises this process to allow requests for exceptions to be made directly through an FHA-approved lender (for financing of a single condominium unit) or through a HUD local field office (for approval of an entire condominium project).

In reviewing exception requests, the Act directs the applicable lender or HUD office to consider the local economy and the total number of family units in the project. Within 90 days of enactment, the Secretary will issue additional guidance specifying standards, training requirements, remedies, and penalties for this review process.

Another key provision of the Act will allow the FHA to fund loans for condominium projects that contain certain deed-based transfer fees. Currently the FHA prohibits funding of loans for condominium projects with any type of deed-based transfer fees. Under the Act, FHA requirements will be aligned with current Fannie Mae and Freddie Mac requirements, which permit funding of loans with transfer fees if the fee goes to a homeowners association, condominium, cooperative, or nonprofit association, and the fee is used exclusively for purposes that provide a direct benefit to the real property encumbered by the fee. Further, these FHA requirements will automatically update to track Fannie Mae and Freddie Mac standards going forward, unless the Secretary provides justification for alternative requirements.

Additionally, the Act aims to reduce the minimum percentage requirement of owner-occupied units in a condominium project. FHA standards currently require at least 50 percent of units to be owner-occupied. Within 90 days of enactment, the Secretary must issue additional guidance for the percentage requirement, along with justifications for the percentage. In the event that the Secretary does not issue guidance within 90 days, the Act reduces the owner-occupancy requirement to 35 percent of units within a condominium project. However, the Secretary may issue guidance requiring more than 35 percent on a project-by-project or regional basis by considering factors such as the local economy and the total number of family units in the project.

Although the Act’s ultimate effect depends on the Secretary’s additional guidance, the changes contemplated should relax current FHA requirements and make FHA financing options more accessible to condominium project developers and buyers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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