Some good news from Capitol Hill this past week came in the form of an announcement that the House approved a Bill (by a 427-0 margin) that would make substantive changes in FHA’s condominium project approval and recertification procedures.
In my November 24, 2015, Blog Post, I discussed three subtle changes implemented by HUD/FHA (at that time) in its condominium project approval procedures:
- A revised calculation of the FHA required owner-occupancy percentage by allowing units that are not investor-owned to be considered as occupied
- An expansion of the types of eligible insurance coverage required to maintain adequate “master coverage”
- Revised re-certification requirements with a revised re-certification checklist
HUD anticipates this would help increase the pool of condominium projects eligible for FHA approval. However, it was (and still is) my opinion that those changes would only have a negligible impact (if any) on FHA loan originations involving condominium units.
This new legislation is targeted at some of the most restrictive components of FHA’s current condo regulations. For example, current policy requires at least 50% of the residents of a condominium project to be owner-occupants.
In some parts of the country, where soft-market conditions exist (especially for condominium units), this 50% minimum threshold is difficult to meet. As a result, this legislation would lower the owner-occupancy requirement to 35% – thereby allowing more condo projects to become FHA approved.
Another proposed change is to increase the maximum percentage of commercial space allowable in a condominium project. The current limit is 25%.
Ironically, in September 2015, FHA increased the maximum allowable commercial space in its Section 203(b) single family residential loan program (1 to 4 unit properties) from 25% to 49%. By increasing the condominium commercial space threshold – many more condominium projects (especially in BIG cities like New York, Boston, Wash. D.C. etc.) would be able to meet the FHA eligibility criteria.
Of course, this Bill must now go through the legislative process and there may be changes made before it goes to the President and signed into law.
One change in particular that I would like to see is to increase the number of years that an approved condominium project remains on the “Approved List” before it has to be re-certified.
The current policy states that FHA condominium project approvals expire in two years from the date of placement on the list. After going through a very comprehensive review process in order to obtain approval, two years is very little time to have to go through a re-certification process.
A more reasonable timeframe would be four years – with the understanding that if any potential problems surface during the underwriting of a loan transaction (i.e. on the appraisal report, inspection report, etc.) involving one of the condo units they would need to be reported to the HUD jurisdictional Homeownership Center for their investigation.
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I would suggest that you continue to read LoanLogics Blog Posts and Newsletters as more information becomes available as to changes in FHA condominium policies and procedures.