NEW FHA CERTIFICATION GUIDELINES TO LAND SOON, ENDING A 5-YEAR HOLDING PATTERN

New FHA Certifications

new fha certificationBy: Tracy N. Danner-Bond, Esq.

On June 30, 2011, the Condominium Project Approval and Processing Guide (“Guide”) was published by the U.S. Department of Housing and Urban Development (“HUD”).  The Guide was designed to provide Federal Housing Administration (“FHA) condominium project approval processing requirements.  Since June 30, 2011, a handful of Mortgagee Letters from HUD have provided small changes to the Guide, but for the most part, the processing requirements contained in the Guide have been in a “holding pattern” for the last 5 years.

On September 13, 2012, Mortgagee Letter 2012-18 was published, making several changes to the Guide.  Most significant of those changes affecting condominium project eligibility are the following:

  • For all existing projects, one investor may own up to 50% of the total units at the time of project approval if at least 50% of the total units in the project have been conveyed or are under contract for purchase. The Guide originally stated no more than 10% of the units may be owned by one investor.
  • No more than 15% of the total units can be delinquent for more than 60 days on payment of condominium association assessments (does not include late fees or other administrative expenses). The Guide originally stated no more than 15% of the total units can be delinquent for more than 30 days.
  • If the condominium association engages the services of a management company, one of the following requirements must be met regarding Fidelity Bond/Fidelity Insurance (aka Employee Dishonesty or Crime Policy) for the management company’s officers, employees, and agents responsible for funds of the association: the management company has its own Fidelity Bond/Fidelity Insurance in an amount no less than the sum equal to 3 months aggregate assessments on all units plus reserve funds unless State law requires a maximum amount of coverage (Michigan does not); or the association’s Fidelity Bond/Fidelity Insurance policy specifically names the management company as an agent or insured; or the association’s Fidelity Bond/Fidelity Insurance policy includes a “Covered Employee” endorsement that states that a person employed by an employment contractor (management company) performing services subject to direction and control by the association is covered under the policy.  The Guide originally stated that the association must require the management company to maintain Fidelity Bond/Fidelity Insurance for its officers, employees and agents handling or responsible for association funds.  The coverage of the management company must name the association as an obligee; it must be an amount not less than the maximum of funds, including reserve funds, in the custody of the association or management agent at any given time during the term of the bond; and the aggregate amount of the bonds must be a sum equal to 3 months’ aggregate assessments on all units plus reserve funds unless State law requires a maximum amount of required coverage (Michigan does not).
  • If the condominium project is proposed, under construction, or a gut rehab conversion, at least 30% of the declared units must be owner-occupied. Legally phased projects must meet 30% presale and 30% owner occupancy requirements, pursuant to the Pre-Sale Requirements chart.  The Guide originally stated proposed, under construction, or gut rehab conversion condominium projects must have at least 30% of the declared units occupied by owners and one year after the first unit conveyance, it must have at least 50% of the declared units occupied by owners.

On August 29, 2014, Mortgage Letter 2014-17 was published, merely extending the requirements established in ML 2012-18 until August 31, 2016.

On November 13, 2015, Mortgagee Letter 2015-27 was published, providing temporary provisions originally set to expire on November 13, 2016.  This Mortgagee Letter revised the calculation of the owner-occupancy percentage required by FHA (vacation homes and secondary residences are considered owner-occupied; the owner-occupancy percentages are calculated differently for multi-phased projects and single-phase projects), it expanded insurance coverage requirements, and it revised the requirements for obtaining condominium project recertification (new HUD checklist form, only amendment documents that were recorded since the last certification application are now required).

On August 24, 2016, Mortgagee Letter 2016-13 was published, extending the requirements established in ML 2012-18 and 2015-27 until August 31, 2017.  This mortgagee letter also announced that the Housing Opportunity Through Modernization Act of 2016, which was signed by President Obama on July 29, 2016, would directly affect topics covered in the Guide.

On September 27, 2016, FHA released a proposed regulatory update.  The 60-day comment period is set to conclude on November 28, 2016.  The requirements for condominium project approval under the proposed rule will be more flexible, less prescriptive, and more in tune with the current market.  The proposed rule includes the following:

  • Condominium approval requirements
    • Baseline property eligibility requirements
    • Commercial space restrictions (range: 25-60%)
    • FHA loan concentration limits (range: 25-75%)
    • Owner occupancy requirements (range: 25-75%, but actual range to be established by HUD)
    • Budget requirement of 10% for reserves
  • Exceptions to FHA certification approval criteria on a case-by-case basis
  • Extended FHA certification approval from 2 to 3 years
  • Recertification will require updating previously submitted information instead of resubmission of all information
  • Spot loan approval for owners may be authorized in condominium communities that are not FHA approved, under certain conditions
  • Site condominiums will be defined

On October 26, 2016, Mortgagee Letter 2016-15 was published, amending Section 3.5 of the Condominium Project Approval and Processing Guide, which addresses the issue of Owner Occupancy Requirements.  Specifically, “Owner Occupancy” is defined and owner occupancy percentages are identified:

  • The definition of “owner occupied units” is now defined as principal residences, secondary residences, or units that have been sold to purchasers who intend to occupy them as primary or secondary residences.
    • Principal Residence – unit where co-owner maintains or will maintain permanent place of abode
    • Secondary Residence – unit co-owner occupies in addition to Principal Residence, but for less than a majority of the calendar year; does not include vacation home
  • For Existing Projects, at least 50 percent of the units must be owner-occupied or sold to owners who intend to occupy the units. This requirement may be as low as 35 percent if the project meets the following conditions:
    • FHA Certification Application must be submitted under the HRAP option; and
    • Financial documents must provide for funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 20% of the budget; and
    • No more than 10% of the total units may be in arrears (more than 60 days past due) on association fee payments; and
    • Three (3) years of acceptable financial documents must be provided.
  • For Proposed, Under Construction, or Gut Rehab Conversions, FHA will allow a minimum owner-occupancy percentage of 30% of the declared units. Legally phased projects must meet 30% presale and 30% owner occupancy requirements.
  • Documentation supporting the owner-occupancy percentage must be provided with the application in one of the following forms:
    • Copies of sales agreements or evidence (loan commitment) that a mortgagee is willing to make the loan; or
    • Evidence that units have closed and are occupied by the owner; or
    • Information from a developer/builder that lists all of the units already sold, under contract, or closed that are or will be occupied by the owner (e.g. a spreadsheet, chart, or listing used for the company’s own tracking purposes) that is accompanied by a signed certification from the developer.

Additional Mortgagee Letters making further changes to the Guide will be released once the proposed rule has been finalized after the commentary period expires on November 28, 2016.

Tracy N. Danner-Bond is a partner with the firm.  Prior to joining the firm in 2004, she practiced estate planning, probate, and tax law.  In addition to continuing her practice in estate planning law, Tracy has extensive experience in community association law.  Her particular expertise includes FHA certification, document amendments, collection matters, and Bylaw violations.

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