New guidelines related to the Federal Housing Administration (FHA) insured loans and Fannie Mae and Freddie Mac purchased loans of Condominium units were put into effect February 1, 2010. It is imperative that Condominium Associations understand and follow these new guidelines in order to be eligible for these loans.

FHA INSURED LOANS

The FHA was created to increase home construction and to operate loan insurance programs. Though the FHA does not make loans directly, it insures loans made by private lenders and is the largest government insurer of mortgages in the world. During better economic times, the percentage of loans which were FHA insured in Northeast Ohio were minimal, recent data suggests that approximately 30% of the current loans being issued in are FHA loans. In Cuyahoga, Lake, Geauga, Lorain and Medina Counties, the maximum FHA insured loan a buyer may obtain is $298,750; in Portage and Summit Counties, the maximum amount is $330,000; in Stark County, the FHA single family limit is $277,500; and in Wayne County, the limit is $271,050. For Condominiums with units listing prices at or below these levels, these Condominiums will want to be approved by the FHA as an eligible Condominium in order to make the units within the Condominiums more marketable.

As of February 1, 2010, Condominium Associations needed full project approval through the FHA prior to an FHA insured loan being issued. Once obtained, the FHA approval is good for two years. The approval is obtained by submitting the required application and documentation through your local HUD office, and there are companies which will process those applications for you. The project approval process is only one step and is incumbent on the Association to compile the necessary application documents to be submitted to HUD. It is estimated to be two to four weeks for the approval process. After February 1, 2010, unless a Condominium is on the approved list by the FHA, insured loans may not be funded in such Condominiums.

Eligibility requirements for obtaining FHA insured loans differ for new and existing Condominiums. Requirements for existing Condominiums include:

  • The Association must have a completed questionnaire
  • At least 50% of the units must be owner occupied and 100% of the common facilities be completed
  • FHA will only insure 50% of loans in a particular Condominium until December 31, 2010. Then it will decrease its ratio to 30%
  • The insurance premiums and deductibles of the Association must be contained within the Association budget
  • Fidelity coverage must be obtained in an amount equal to three (3) months aggregate assessments plus reserve funds
  • The Association's insurance must cover 100% of the replacement cost exclusive of land
  • Not more than 15% of the units may be delinquent more than thirty (30) days on the payment of their assessments
  • Associations which allow its daily rentals are ineligible
  • There may not be any litigation, other than assessment collection, but the FHA will entertain exemptions for this issue on a case by case basis
  • Condominium hotels, timeshares and projects not deemed to be used primarily for residential purposes are not eligible for FHA insured loans

Associations should be proactive and take the initiative in obtaining the necessary FHA approval, rather than wait for the initial buyer and seller to potentially lose a sale over such a delay. Associations should also account for the cost of the project approval to be several thousand dollars depending upon the approval company and whether issues come up during the project approval process.

FANNIE MAE LOANS

Fannie Mae (The Federal National Mortgage Association) was established for the purpose of purchasing FHA loans from loan originators to provide liquidity for government-insured loans. Fannie Mae is important to mortgage companies since they generally do not hold deposit assets and must sell their loans quickly to keep available cash reserves. Fannie Mae's new requirements overlap to a degree with FHA's requirements. Highlights of Fannie Mae's specific requirements include:

  • At least 90% of the total units in the project must be conveyed to unit purchasers
  • Control of the Association has been turned over to the unit owners
  • Loans on projects that offer rentals on a daily basis, projects with individual units operated as a hotel or motel, projects with mandatory rental pooling agreements and projects with more than 20% of the total space is used for non-residential purposes are not eligible to be purchased by Fannie Mae

FREDDIE MAC LOANS

Freddie Mac (Federal Home Loan Mortgage Corporation) is a federally charted corporation established to purchase mortgages in the secondary market with the intent to stabilize the nation's residential markets and expand homeownership. Freddie Mac is an important component to provide liquidity to the secondary market for residential mortgages. Like Fannie Mae's requirements, Freddie Mac's new requirements have overlap with FHA's requirements. Highlights of Freddie Mac's specific requirements include:

  • At least 90% of the total units in the project must be conveyed to unit purchasers
  • Control of the Association has been turned over to the unit owners
  • No more than 20% of the income of the Association can be from sources other than dues and assessments
  • Loans on timeshares, hotel projects, projects with more than 20% of the total square footage being used for non residential purposes, projects in litigation, arbitration and mediation that arises out of a dispute of safety, structural soundness or habitability of a project, and any Condominium that Fannie Mae has rejected are not eligible to be purchased by Freddie Mac

Associations should become fully informed regarding the current changes to FHA, Fannie Mae and Freddie Mac requirements and seek the necessary approvals to avoid unintentional consequences of the Association's unit owners and potential buyers of units from having difficulties refinancing or obtaining FHA insured or Fannie Mae and Freddie Mac backed loans.