Changes in Condominium Lending Rules

The Department of Housing and Urban Development (HUD) has issued revisions to its condominium lending rules, effective October 15, 2019. In 2009 HUD began predicating FHA condominium loans on the entire project being approved by meeting certain minimum guidelines. HUD slightly liberalized its rules in 2012, which were modified again by Congress in 2018 through the enacted H.R. 3700. Here are some highlights of the new changes.

The most significant change is that individual unit buyers will be able to obtain FHA loans even if the HOA is not HUD-approved. In non-HUD-approved HOAs, up to 20% of its members could qualify individually for FHA loans if the HOA meets certain criteria.

The new rules also will liberalize the renewal process, as approved associations will now renew every three years instead of the current two-year cycle. Henceforth, renewals will be simpler, by updating the information on file rather than the current full reapplication process.

One aspect of this update is negative, at least for “site condominiums,” condominiums consisting of individual detached dwellings. Although the previous rules excluded “site condominiums” the new rules include them, meaning that FHA loans in this unusual type of condominium now will also require project approval.

Regarding project owner occupancy, HUD rules will permit granting special exceptions from the normal minimum of at least 50% owner-occupied condominiums to as low as 30%. Homes occupied part-time by their owners will be counted as “owner-occupied.”

While the general HUD rule is that a maximum of 25% of the floor space in a project can be non-residential units, with exceptions granted up to 35%, under the new rule HUD can grant special exceptions up to a maximum of 55% of the floor space.

HUD predicts the changes will create eligibility for 20,000 to 60,000 more condominium units annually, but it is unclear how much this will actually impact the HOA housing sector. Most associations are not “approved” projects for several reasons. Many associations cannot qualify, others do not need FHA loans for their members, and still others are unaware of the requirements. HUD’s web site www.hud.gov lists 3,465 California condominium associations presently approved for FHA loans, a small fraction of the over 30,000 such associations. HUD lists 15,000 total projects nationwide as presently approved, which is roughly 10% of the 132,000-146,000 condominium associations in the USA today (statistic courtesy of Clifford Treese of Association Data, Inc.).

Some have argued that condominium association boards have an obligation to seek and achieve FHA loan approval from HUD, but there is no such legal requirement. Many associations are not desirable for first-time home buyers and FHA loan availability would not accomplish anything.

California managers and boards should remember that the Annual Budget Report must include a disclosure statement as to whether the association project is approved for FHA loans, per Civil Code Section 5300(b)(10).

FHA loans are not the only loans available for condominium homebuyers. FHA loans are designed for first-time home buyers, with more relaxed credit rating requirements and a much lower down payment.

The Federal National Mortgage Association (“FNMA”) underwrites residential home loans within specified limits and has condominium lending requirements which are similar but not identical to HUD. FNMA’s condominium project requirements can be reviewed at www.fanniemae.com.

Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.