Our Condominium Has 50% FHA Concentration – Now What?

Our first response would be to make sure that you don’t lose your FHA Condominium Project Approval! Obviously, FHA buyers are attracted to your community so it would be beneficial to the association to maintain this approval (Law of Supply and Demand).

Really, though, the question stems from the FHA guideline that the maximum concentration of FHA loans in a condominium is 50%. FHA uses case numbers to track all FHA loans and no FHA loan may exist without one. Once the 50% level is reached, case numbers may no longer be automatically assigned using FHA’s online system FHA Connection.

However, FHA does allow greater than 50% concentration in condominiums that meet its guidelines to be granted an exception. In these cases, lenders must contact the jurisdictional Homeownership Center (HOC) and request a case number manually. If the condominium meets the exception criteria, FHA will allow up to 100% FHA loan concentration in the condominium.

All of these criteria must be met in order for FHA to allow the exception:

 The project must have at least 4 units
 The project must be 100% complete and has been completed for more than 1 year
 100% of the units have transferred from the developer and no one entity owns more than 10% of the units**
 The project’s budget provides for the funding of a reserve account greater than or equal to 10% of the annual budget
 Voting control has transferred to the unit owners
 The owner-occupancy ratio is at least 50%

**Exceptions to the 10% criterion: (1) if the project is 10 units or less, no one person/entity may own more than one unit; (2) Federal, state and qualified non-profit programs may own more than 10% of the units provided that the program is designed to assist low- and moderate- income buyers and renters; and (3) units owned and inhabited by an investor are considered owner-occupied.

The concentration exception terminates with the expiration of the condominium’s FHA project approval. Once the project is recertified, the concentration exception may be sought again. Unless HUD changes this with the issuance of another Mortgagee Letter, it can be assumed that exceptions will continue to be granted once the project is approved and continues to meet the above-mentioned criteria.

Does HUD Allow Private Transfer Fees? Yes and No

One of the major topics of discussion at a round table discussion with HUD was Private Transfer Fees, aka 3rd party transfer fees, community enhancement fees or any other fancy name that you might have heard. Basically, these fees are deed restrictions which require the seller of a condominium unit to pay a fee to an entity other than the buyer upon conveyance. A third party could include a management company, the association or an affiliated or unaffiliated entity.
HUD said that it is encountering an increasing number of condominiums whose legal governing documents require that unit owners pay some sort of 3rd party fee upon the sale of the unit. These fees are subject to 24CFR203.41. This section of the Code states that legal restrictions on conveyance may not limit the sales proceeds retained by the seller. [This doesn’t only apply to condominiums.]
Basically, a condominium’s CC&Rs may not limit the amount a seller may gain from the sale of his/her unit EXCEPT for the exceptions laid out in the section of the code named above.
Because governmental language can be vague at times (ah-hem), the session sought to clarify it as it pertains to condominiums:
 Third party fees that are administrative in nature are acceptable. This would include reasonable fees charged by an HOA or management company for the processing of resale packages or for updating the list of unit owners, among other administrative-type duties.
 Capital contributions are acceptable. Again, within reason, a requirement for the seller to contribute to the reserve account is acceptable because it is a benefit to the association.
 Fees paid to affiliated or unaffiliated third parties are NOT acceptable. These would include required transfer fees paid to entities such as non-profit organizations that are not for the betterment of the condominium. This could be a topic in and of itself.
 Fees may NOT be a percentage of the sales price even if the fees belong to the first two categories above.
 Buyers may NOT pay the fees that are not acceptable. Even though the section of the Code pertains to the proceeds of the sale to sellers, HUD has determined that buyers may not pay the fees on behalf of the sellers.
If a developer or association wishes to collect the unacceptable fees and still be eligible for an FHA project approval (and, therefore, FHA-insured loans), creating an exemption in the CC&Rs for units encumbered with FHA financing is allowed. However, HUD does want specific language to be included in order for the project to be eligible.

Do You Sign Appendix A When You Submit a Condo for FHA Approval?

First off, HUD will only review packages submitted by the following entities: Lender, Builder/Developer, HOA, Management Company, Attorney or Consultant. They have been receiving packages from real estate agents, mortgage loan officers, unit owners and others. Moving forward, any packages submitted by any entity who do not belong to the first group will be returned without review.
Secondly, incomplete packages submitted to HUD will be returned to sender prior to review. It was not mentioned during the session as to whether or not HUD would include which document(s) are deficient. HUD did say that those submitting approval packages should know what documents are to be included in the submissions. Which leads to the next, and most important point…
Appendix A: Project Certification… so much to say here…
Appendix A is a signed document whereby the submitter certifies to HUD that: (1) the information and statements are true and correct; (2) the project meets all FHA condo approval guidelines; and (3) there are no known circumstances or conditions that might have an adverse affect on the condominium. Appendix A was created in 2011 and modified in 2012.
Appendix A must be signed by the submitter. There are many who submit FHA condo approval packages to HUD that are signed by someone other than the submitter. Regardless of who signs Appendix A, the submitter is still responsible for the information contained in the submission package and will be treated as if he/she signed Appendix A.
Appendix A will be enforced. Item #2 on Appendix A states that the condominium meets HUD’s requirements for project approval. Moving forward, it will be enforced in that:
1. If the project is not eligible for HUD approval, the submitter may be penalized. $3500 per infraction was mentioned.
2. Repeat offenders will be placed on HUD’s LDP list which means that they will not be able to work with HUD in any capacity.
3. Repeat offenders may be prosecuted. The maximum penalty for a false certification is up to 30 years imprisonment, $1,000,000 fine or both.
There will be no more “spaghetti tests” where submitters assemble a questionable package and send it to HUD. If you submit a package to HUD that is not approvable, you could be subject to a $3500 fine. If you submit many questionable packages, you could face further penalties according to Title 18 U.S.C. 1014 and land on the LDP list.
We have seen many condominiums that were previously approved by HUD that should not have been; everyone makes mistakes or guidelines may have changed since the previous approval. Submission of these condominiums for recertification may result in penalties as mentioned above. If you sign Appendix A, you are responsible for the package that is submitted to HUD.

FHA Clarifies its Position on Leasing Restrictions in Condominiums

FHA-allowed leasing restrictions in condominiums has been a hot topic as of late. As we all know, a condominium’s legal governing documents may place restrictions on the leasing of units in the condominium. These restrictions can vary greatly and recently HUD clarified what is and is not allowable.
“If the homeowners association has approval authority of a unit owner’s ability to lease his/her unit either directly or indirectly, the condominium is ineligible for project approval with FHA.”
During the ensuing discussion, the following clarifications were offered.

Allowable Leasing Restrictions
The association can
 Restrict total number of units that can be rented at any given time
 Restrict the total percentage of units that may be leased at any given time
 Create a hardship clause for exception to the first two above
 Require that the Board be provided with a copy of the lease
 Require that the lease must be in writing
 Request the names of the tenants
 Require that the lease conforms to the legal governing documents of the association
 Set minimum and maximum lease periods
 Require unit owner to check the Registered Sex Offenders list
 Require rent to be assigned to association if the unit owner is delinquent in the payment of his/her common charges
 Provide corporate leasing restrictions
 Require Board review of lease [May not require approval of lease]
 Require that the lease be on a specific form

Non-allowable Leasing Restrictions
The association cannot
 Outright restrict leasing of all units (at least one unit in the condominium must be allowed to be leased) [**See Note below]
 Require that the unit owner own the unit for a period of time prior to being allowed to lease the unit
 Require Board/HOA approval of lease
 Require Board/HOA approval of modifications to, alterations of, amendments to or extensions of lease
 Be granted automatic power of attorney by the unit owner upon purchase of a unit
 Restrict a unit owner’s ability to lease his/her unit if he/she is delinquent in the payment of common charges
 Require potential tenants to sit with the Board
 Require credit references
 Require criminal background checks (except for Registered Sex Offenders list)
 Require Board/HOA approval of tenant
 Have the power to void leases (leases cannot be voidable by a third party)
 Allow transient leasing
 Allow accommodations typically associated with a hotel, such as maid or front desk service.
**NOTE: There are two exceptions where an association can outright restrict leasing: age-restricted communities and condominiums where 100% of the units are under Affordable Housing restriction.
If you have specific leasing restriction questions, please contact us. We would be happy to answer any of your questions on this matter. Approvals@readysetloan.com

Airbnb and FHA Condominium Approval

One of the topics on HUD’s agenda for the round table session last month was that of “Airbnbs”.  We have to admit that even with all of the condominiums that we have worked with, this was a new concept for us.  None of the legal documents of our condominium clients had any such language in them.
In case this is new to you, Airbnb is when unit owners allow overnight guests or trading of units on a temporary basis.  We understand that this is more common in areas where unit owners can provide an alternative to hotels in resort areas or for large events such as a university graduation.
Airbnb is a topic for discussion for HUD because this falls into the category of transient leasing, which is prohibited by the National Housing Act.  A home, whether it be a single family home, 2- to 4-family home or condominium unit, may not allow leasing for a period of less than 30 days.  Therefore if the condominium consists of Airbnb units, the project is not eligible for FHA project approval or FHA-insured loans.
The obvious dilemma here: how can it be determined if unit owners are offering their units in this manner?  Tracking this would become a nightmare.
HUD has not formally released an update to guidance for project approval to spell out how it will handle Airbnb.
The linked article above regarding transient leasing provides how HUD ruled on that issue.  Basically, if the legal documents are silent on transient leasing or set a minimum lease term of greater than 30 days, the condominium is acceptable.  If the documents allow for lease terms of less than 30 days or provide exemptions for anyone to the minimum leasing period, HUD will require additional documentation for the condominium to acquire approval.

What Types of Condominium Projects are Approvable by FHA?

This is one of the most commonly-asked question that we receive.  The better question to answer is Which types of condominiums are NOT approvable by FHA?   Then we can deduce that all other types of condominiums are eligible for FHA condominium project approval.
These projects are ineligible for FHA condominium project approval:

♣ Projects where more than 25% of the total floor area is non-residential.  That is the basic guideline although there may be exceptions granted that will allow up to 50% in certain circumstances.
♣ Timeshares and Condohotels (Condotels).  Segmented unit ownership or condominiums that also operate as a hotel.  Condominiums cannot offer hotel-type services such as a front desk, room service or maid/cleaning service or offer leases or rentals for less than 30 days (aka “transient leasing”).
♣ Multi-dwelling unit condominiums are fairly rare but this means that the condo units are multi-family dwellings and the project consists of a grouping of these whether they are attached or detached.  These are not allowed.
♣ Mandatory rental pooling of the units is not allowed.
♣ Condominiums converted from hotels or motels.
♣ “Cloud Condominiums and Co-Housing communities: “Cloud” condominiums are not eligible for FHA approval.  Co-housing communities may be eligible if they meet FHA guidelines for approval.
♣ Mandatory membership to a country club or the like.  Condominiums can be required to be a part of a Master Association but it cannot require unit owners to be members of any type of club, such as a golf or racket club.
♣ Houseboat condominiums is not something that we have seen but there must be enough of them out there – somewhere – for FHA to mention them on this list.
♣ Projects in designated coastal barriers according to FEMA such as sections of the Atlantic Coast, Great Lakes and Gulf of Mexico.
♣ Occupancy restrictions which is an entire topic by itself.  Basically, a third party, such as an HOA, cannot prevent or restrict the leasing or sale of a unit except under certain circumstances nor can the HOA screen a potential buyer or lessee (except the Registered Sex Offenders list).  A right of first refusal is acceptable provided that it is written in the proper manner.
♣ Projects that outright restrict leasing.  A project has to allow leasing of at least one unit.  Exceptions include age-restricted communities and projects that consist entirely of Affordable Housing units or the like.
♣ Conveyance/deed restrictions that require 3rd party transfer fees which are not administrative in nature or benefit the association directly.  For example, a transfer fee of $300 paid to the HOA for providing resale packages is acceptable as is one which contributes to the association’s reserve account.  Unacceptable transfer fees include those tied to a percentage of the sales price or those paid to a “nonprofit organization” for any reason.
The above list represents the major categories of condominiums that are not eligible for FHA project approval.  Most of them are also not eligible for Fannie Mae (conventional) financing options as well.  Age-restricted and Affordable Housing communities may be eligible for FHA project approval if they meet other FHA criteria for approval.

Forget the Bathing Suits this Summer as a Nudist Community Tries to Get Approved through HUD for FHA Loans

In the spirit of summer, we are going to revisit an old topic about nudist colonies.
Condominiums come in all sorts of shapes and sizes and this one is no different.  Well, it is a little bit different… There is a condominium project that wishes to obtain FHA project approval for its unit owners and to allow FHA purchase loans.  The sales prices of the units are in FHA’s “sweet spot” so the association is really pushing to get it done.
The project’s composition is acceptable to FHA consisting primarily of residential units with a few commercial components, one of them being a bar/night club.  The project’s financials are up to FHA’s standards and the owner-occupancy rate hovers around 100%.  Unit owners are nearly perfect in the payment of their common charges.  The units are in very high demand and there is a waiting list to move into the community.
All of the major aspects of the condominium meet FHA’s guidelines.  However, the condominium is a nudist community.  This, on its own, does not present a threat to the condominium’s eligibility for FHA approval.    The issue is that all unit owners are required by the legal governing documents to acquire and maintain membership to either a regional or national nudist organization.
This violates the National Housing Act in that it is requiring that the unit owners become members of an outside organization or club.  Because of this, the condominium, and, therefore, the units are not eligible for FHA-insured loans.  This is akin to a condominium requiring the unit owners to join an affiliated golf club or the Master Association’s boating club.
The community is very disappointed in their ineligibility and have verbalized that they are being discriminated against.  First of all, nudists are not a protected class so the accusation is unfounded in that regard.  But second, and most importantly, it is the requirement for membership which renders the condominium ineligible.  If they were to amend the legal documents to remove this requirement, they would be eligible

That Doesn’t Count Towards the 10% Reserve Contribution

10% Reserve ContributionIt’s budget season for many condominiums who run on a calendar year and we have run across an issue with several of our clients and potential clients.  Everyone knows that FHA (and Fannie/Freddie) requires that a condominium contribute 10% of its budget to the reserve fund each year.  So when don’t the contributions count towards the 10%?

When the funds are already delegated to fund an existing liability.  We have seen this many times but let’s take a recent example:

A condominium client’s budget is $450,000 so the minimum that they should be transferring annually to reserves is $45,000.  On the budget, the reserve transfer line item is $130,000.  So they should be good, right?  Not in this case.  What the operating budget doesn’t show is that the association’s loan payments are made from the reserve account…loan payments that total $128,500 annually.

This means that out of the $130,000, the actual reserve contribution is $1,500, far shy of the required $45,000.  The $128,500 in loan payments are an existing liability so this part of the reserve contribution has already been spent.

It doesn’t matter whether or not the Association is paying for the loan from the Operating or Reserve account.  The liability exists and the Association must budget for it plus the 10% reserve contribution.

Thus, at the moment, this Association is not eligible for FHA Condominium Project Approval.  It will have to include both the loan payment and the 10% contribution for its budget for 2016 unless it can provide a reserve study which indicates that the current level of reserve funding is adequate.

Top Photo Credit: (c) Can Stock Photo / filmfoto

I Challenge the Assertion the Condo is Not Approvable by FHA

gstockstudio_2This week, I had to pass along news to a property manager that her condominium client was not eligible for FHA approval due to leasing restrictions.  Upon receiving the news, she fired back an email stating that she challenged the assertion because the condominium has “always been FHA approved” and the legal documents have always contained that language.

She went on to say that most condominiums in the area have similar leasing restriction language because it is associations’ only recourse against a problem tenant.

We can certainly understand her frustration.  The condominium was approved with FHA two years ago and the legal documents have not been amended.  Here is my response email:

I can understand your position and had already inquired with HUD before sending the email, below.  However, because the condominium was approved two years ago does not mean that it was reviewed properly at that time nor does it take into account that there have been further clarifications to FHA’s guidance.  I also agree with you that other condominiums have similar language; however, those with identical language would also not be eligible.

Unfortunately, the fact that it “has always been FHA approved” has no relevance to the current situation.  We have had several condominiums that have been rejected by HUD that were approved just two years ago for leasing restriction violations.  HUD changed the qualifications for condominium project approval in written form in 2009 and then again in 2011 and 2012.  It provided written updates and clarifications to the guidance in 2011 and 2013.  It provided verbal clarifications during the Roundtable Sessions that I attended in 2014 and 2015.

However, the underlying law behind all of it is the National Housing Act which is in the Code of Federal Regulations.  In this Section of the Code, it creates the rules for FHA-insured loans.  The Section pertaining to leasing restrictions is 24CFR203.41, which speaks to “free assumability”.  HUD does not have to issue written policy on leasing restrictions because it is already there in the Code.

24CFR203.41(b) states: “Policy of free assumability with no restrictions. A mortgage shall not be eligible for insurance if the mortgaged property is subject to legal restrictions on conveyance, except as permitted by this part.”  You can read the Section of the Regs if you like; I linked to it above.  The exceptions “permitted by this part” are subsections c-g and include:

  • Eligible government or nonprofit programs and specific policies
  • Tax-exempt bond financing
  • 55+ communities
  • Specific jurisdictions (Indian lands, certain Hawaiian home lands, etc)

24CFR203.41(a)(3)(i) states: “Legal restrictions on conveyance means any provision in any legal instrument, law or regulation applicable to the mortgagor or the mortgaged property, including but not limited to a lease, deed, sales contract, declaration of covenants, declaration of condominium, option, right of first refusal, will, or trust agreement, that attempts to cause a conveyance (including a lease) made by the mortgagor to:

(i) Be void or voidable by a third party;” [Emphasis added]

Section 14.1(k) of the Declaration of [name removed] condominium states: “if any Residential Unit Owner/lessor or lessee is in violation of any of the provisions of the lease, this Declaration or the condominium Rules and Regulations, the Association may bring an action in its own name or in the name of the residential Unit Owner/lessor, lessee or both, to have the lessee evicted or to recover damages, or both.

Section 14.3 states: “The Association…shall have the rights of enforcement of any lease4 of a Residential Unit directly against the lessee(s) including, without limitation, the right to terminate any lease by reason of violation…

Because the Association has the authority to terminate leases, it violates 24CFR203.41(b) “free assumability” which renders the condominium ineligible for FHA-insured loans.  This also means that it is not eligible for project approval.

wanamakerFurthermore, I inquired about the language in Sections 14.1(i) and (k) to verify compliance.  In an email from the Philadelphia Homeownership Center:


14.1 (i) is acceptable.

14.1 (k) is unacceptable.


Beyond that, it would be escalated to HUD in Washington, DC.  I verified this very information at the Roundtable on August 27, 2015.  The Association cannot have the power to void leases; it can only levy fines for leasing violations.

Therefore, the condominium will have to remove Sections 14.1(k) and 14.3 in order to be eligible for project approval.”

9 Types of Condo Projects that Must be Reviewed by HUD/HRAP

HUDWhile HUD allows lenders with Direct Endorsement authority to review and approve condominium projects on HUD’s behalf (DELRAP), there are 9 different circumstances where the condominium must be reviewed by HUD (HRAP).

  • Condominiums in Florida.  Due to the issues in the condominium real estate market in Florida, all condominium project approvals must be reviewed by the Atlanta Homeownership Center.
  • In Bankruptcy or Receivership.  The fact that the condominium project or the developer is in bankruptcy or receivership is not an automatic disqualification for project approval but it must be reviewed by HUD.
  • Manufactured Housing Condominium Projects (MHCPs).  MHCPs are not considered Site Condo Projects and must be reviewed by HUD.
  • Converted Non-Gut Rehabilitation Condominiums.  This includes project submissions that have been converted to a condominium regime within the past two years.  Consult ML12-18 for the definition of “non-gut”.
  • Mixed-use condominiums with commercial space exceeding 25% of the total floor area.  The standard guideline for commercial space in a condominium project is 25%.  However, HUD will allow up to 50% commercial floor area on an exception basis but it must be reviewed by HUD.
  • Live-work condominium projects.  Condominiums containing live-work units must be reviewed by HUD.
  • Condominiums with Rent-stabilized and Below-Market-Rent (BMR) units.  These must be reviewed by HUD.
  • Condominiums containing Affordable Housing Units.  Condominiums with Affordable Housing Units may be eligible for project approval if they meet the requirements of 24CFR203.41 but must be reviewed by HUD.
  • Condominiums that have been Rejected or Withdrawn in the previous 12 months.  If a condominium has been Rejected or Withdrawn either through HRAP or DELRAP, the project must be submitted to HUD for approval/reconsideration.