The ABC’s of FHA condo requirements

The ABC’s of FHA condo requirements
By Pamela Dittmer McKuen
Copyright © 2010, Chicago Tribune
11:46 a.m. CDT, April 29, 2010
http://www.chicagotribune.com/news/ct-home-0430-condo-living-fha-regulations20100429,0,1737349,full.story


Condominium associations now have to prove they are worthy investments, according to new regulations from the Federal Housing Administration.

As of Feb. 1, associations with two or more units must be FHA-certified before the agency will back a mortgage. The previous policy of allowing one-time, or "spot approval," for individual units was rescinded.
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FHA loans have grown extremely popular in recent years. The country's economic meltdown prompted conventional lenders to require higher downpayments and credit scores, but qualified FHA buyers can own a home for as little as 3.5 percent down. The agency insured 2 percent of home mortgages in 2007 and 30 percent in 2009. The numbers are rising.

"There aren't a lot of people with a lot of money to put down these days," said Steve Stenger, president of Condo Approval Professionals LLC in Lake in the Hills.

What this means for associations is if they aren't certified, their owners lose out on a large pool of prospective buyers, said Michael Thomas, a real estate broker with @Properties in Evanston.

"The more buyers, the more competition, and competition is what keeps prices at a higher level," he said.

Certified associations stand out in the market, said Joe Langley, a real estate broker with ReMax In The Village in Oak Park.

"There is no other rating system for condo associations," he said. "FHA approval separates the well-run associations from those that aren't."

Among the certification criteria:

--All units and common elements must be completely built.

--No single entity can own more than 10 percent or more than one of the units, whichever is greater.

--At least 50 percent of the units must be owner-occupied.

--No more than 15 percent of the units can be more than 30 days delinquent on assessments.

--No more than 25 percent of the total floor area can be used commercially.

--At least 10 percent of the annual budget must go to reserves.

--The right of first refusal is OK as long as it isn't used to discriminate.

In addition, associations must submit copies of their budget, insurance policy, declaration and bylaws, plat of survey, any management agreement, analysis of outstanding or pending litigation, and minutes from the last two meetings.

Associations can become certified in one of two ways. The first is to wait for an FHA buyer to come along and let the buyer's lender do the work. Certain lenders, typically the largest ones, are eligible to certify associations under the Direct Endorsement Lender Review and Approval Process, or DELRAP. The association supplies the necessary documents and information.

Certification via lender takes two to four weeks, and fees vary, depending on the size of the association and company policies.

The second way is for associations to apply directly to the U.S. Department of Housing and Urban Development, which oversees the FHA. This is called the HUD Review and Approval Process, or HRAP. Decisions are coming down in four to six weeks, said Judith Heaney, supervisory operations officer for HUD's Chicago regional office.

Many associations hire consultants such as Stenger or their attorneys to assemble and submit applications. Stenger's rates slide, starting at $500 for small associations. Attorneys charge more, and management companies might add fees as well.

Which way to go depends on the association and its resources. Viewpoints are varied.

"We are advising our associations to do HRAP and work with an attorney who understands the process," said Lou Lutz, president of Legum & Norman Mid-West in Chicago. "In the long run, if it is not done properly and the association is rejected, it can be even more costly to the unit owners."

Early certification will benefit current owners who wish to refinance or who need to sell, perhaps to settle an estate, said Heaney.

"Once it's done, it's done," said Stenger. "Then it doesn't matter who the buyer uses for a lender."

Langley noted that some buyers prefer to shop at approved associations rather than take a chance on those that aren't. But certification is good for only two years, and an association could spend time and money but not have a sale for six months.

"I see an advantage in preparing the package ahead of time so we can advertise a unit as being FHA DELRAP-ready," he said.

"The associations know what's appropriate for their ownership," said Heaney.

For more information, call the FHA helpline at 800-225-5342 (800-CALL-FHA) or e-mail condoprojectapprovalinquiries@hud.gov. Be patient.