Our Condominium’s FHA Concentration is 75%, What Do We Do?

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kenhurst_300pxThis is a question that arises now and again.  A condominium gets approved with FHA and then a borrower has difficulty obtaining a loan because the FHA concentration is above 50%.

Such is the case with one of the condominiums we helped to get recertified last year.  The loan officer sent an email to the property manager stating that the FHA concentration was 75% and inquired if she knew that.  She then contacted me concerned that this was a problem and asked for an explanation.

Here is my reply:

FHA “concentration” means the percentage of units that are encumbered with FHA financing. According to FHA’s site, 75% of the units in the condominium are financed with FHA loans.   FHA allows up to 50% of the units to be financed with FHA loans but allows exceptions for projects that meet the following criteria:

  • The project has at least four (4) units. YES
  • The project is 100 percent complete and construction has been completed for at least one year, as evidenced by issuance of the final or temporary/conditional certificate of occupancy for last unit conveyed;  YES
  • 100 percent of the units have been sold and no entity owns more than 10 percent of the units in the project;  YES
  • The project’s budget provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; YES
  • Control of the Homeowners Association has transferred to the owners; YES
  • The owner-occupancy ratio is at least 50 percent. YES
  • The exception terminates with the expiration of the current project approval.

According to these criteria, the condominium qualifies for the exception.  As such, FHA will allow up to 100% of the units to be encumbered with FHA financing.

However, standard procedure does not apply once the concentration surpasses the 50% mark.  FHA Case Numbers cannot be assigned using the FHA Connection system.

[A Case Number is the tracking device that HUD uses for all FHA loans and a loan cannot be processed without one.]

The lender must contact the jurisdictional Home Ownership Center (HOC) to be granted the exception and acquire the Case Number.  In this case, the HOC is in Philadelphia; the lender should know who to contact there.

Please let me know if you have any questions about this or if I can help facilitate the loan approval.

 

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

6-Unit Condominium Approved with FHA in 9 Days

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fotomine_300pxIn February, we were contacted by a unit owner in a 6-unit condominium in Chicago.  His condominium’s FHA approval was due to expire in June.  He had read my article about FHA concentration and had some questions.  After speaking to me, he said that he wanted to hire us to handle the recertification.

Fast forward a couple of months and he retained us.  We sent him the questionnaire and requested the necessary documents.  We didn’t hear back from him for several weeks.

On May 26 when we sent a routine follow-up, he called me in a panic.  Apparently, once he signed the retainer agreement and sent us the check, he thought that it was just done.  The approval was due to expire on 6/10/15 and he has one, possibly two, pending sales to FHA buyers that could be in jeopardy if it doesn’t get approved quickly.

We re-sent the questionnaire and checklist to him, but we broke down exactly what we needed and told him to ignore items that we don’t need.  We went online and downloaded all of the legal documents that we needed for submission (it cost us $6.50, by the way).  The package was complete May 29th and overnighted to HUD in Atlanta.

On June 4, I received a call from the unit owner asking if he was seeing things.  He said that the condominium was updated as approved in FHA’s system and wanted me to verify the information.  He was correct.  The Atlanta Homeownership Center (HOC) had received the file on Monday June 1st, logged it in their system on Tuesday and approved it on June 4th.  The unit owner could not have been happier.

This is certainly not a typical timeframe but for this unit owner, it couldn’t have been timelier, pun intended.

Current processing times for the FHA Homeownership Centers are:

Philadelphia: 3 weeks
Atlanta: 2 weeks
Santa Ana: 3 weeks
Denver: 2 ½ weeks

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

But the Master Association Has Reserves

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kenhurst_300pxA few months ago, I received a phone call from a reverse mortgage loan officer regarding an association that was recently Rejected for an FHA Condominium Approval.  He said that he has clients in the community trying to get a reverse mortgage but can’t because it is not approved with FHA.

Another company had submitted the condominium to FHA for approval but once it was Rejected, they didn’t know how to get it approved.  Although there were several reasons for the Rejection, the biggest hurdle was that the condominium did not have its own reserve account.  FHA requires that 10% of the annual common charges be contributed to a reserve account each year.

At first glance, this condominium was not doing so.  However, after a conference call with the loan officer and the property manager, a light appeared at the end of the tunnel.

The condominium shares a campus with another condominium.  The two are part of a Master Association.  The Master Association is responsible for the collection of all common charges in both condominiums.  All common elements and limited common elements are owned by the Master Association; their maintenance and upkeep are the responsibility of the Master.  The two condominiums have few bills of their own.

Neither of the two condominiums maintain their own reserve accounts.  The Master Association maintains reserve accounts and collects money for their funding annually.  Because the condominiums don’t own their common elements, I didn’t believe that the condominium would be required by FHA to have its own reserve account.  Since the Master met FHA’s reserve requirements, the condominium should get approved.

We accepted the challenge and began compiling documents.  They included the budgets, income statements and balance sheets for both condominiums and the Master as well as the legal governing documents for the Master.

After some back-and-forth with FHA and providing detailed explanations of the workings of the Master and the condominiums, we were pleased to provide the condominium with the FHA approval notification today.

Shortly thereafter, I received a voicemail from the loan officer that nearly ruptured my eardrum.  Let’s just say that he wasn’t as optimistic as I was that the approval was forthcoming and his jubilation spilled over in the form of volume on the message.  It may be the best business voicemail of all time.

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

Can We Not Send that Document to FHA?

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elensthewise_300pxWe are currently processing a 2-year FHA recertification for a small 6-unit condominium.  It was approved with FHA in June of 2013 so it should be a piece of cake, right?  Well, maybe not…

Our contact with the association hired us after reading a few of our blogs.  He called when he had some questions regarding FHA loan concentration limits.  Satisfied with our level of understanding of the FHA guidelines and process, he hired us to help him.

During our process of collecting the documents, we uncovered an Amendment to the Declaration filed in 2012, which was prior to the project’s previous approval (nice alliteration).  The Amendment stated that as of the date of filing, all units must now only be owner-occupied and gave powers to the Board to evict tenants and levy penalties against the unit owners if they leased their units.

Because leasing is not allowed in the project at all, FHA will not recertify this project.  FHA states that at least one unit in any condominium project must be allowed to be leased; the outright restriction of leasing if forbidden.

I brought this to the attention of our client.  He was baffled because they were approved in 2013.  I said that the rules hadn’t changed since then so the only potential reason was that the Amendment wasn’t provided to FHA during the original approval process.

He asked the next logical question: “Can we not supply that document to FHA?”

I replied: “Part of the submission package is a document that we sign certifying that the information provided is true, accurate and complete and that the project meets FHA’s guidelines.  With knowledge of the Amendment, signing this form constitutes fraud and the penalty can be 20 years imprisonment and/or $1,000,000 fine.  This is something that we simply won’t do.”

He agreed and retracted his question and posed a second asking what can be done to correct this.  I told him that they would have to file an Amendment on the land records to remove this restriction.  Currently, he is working with the association’s attorney to draft an amendment that will allow a maximum of 3 units to be leased at any given time.  This leasing restriction does meet FHA’s guidelines.

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

No Pooled Insurance Without a Master Condo Association

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gstockstudio_2This may be one of those cases where FHA makes internal changes to its guidelines for condominium project approval and doesn’t tell anyone, which sometimes happens.  We who submit condominiums for FHA project approval often don’t learn about such internal changes until we submit a project that gets rejected for a reason that we have NEVER heard of.

We are working with a condominium project that shares insurance policies with a bordering condominium.  Let’s call them Condo1 and Condo2, respectively.  Both condominiums benefit from the pooled policy by paying reduced premiums.  In this case, there is sufficient coverage in the policy to replace all buildings and amenities if catastrophe struck and both communities were destroyed.  The liability coverage and fidelity/employee dishonesty coverages also meet FHA’s guidelines.

Condo1 was rejected by FHA for having a pooled insurance policy and the reviewer asked for the Declaration and By-laws for the Master Association.  These documents don’t exist; they are unaffiliated.

This was news to us because we have worked with several associations that have had pooled insurance policies with other condominiums that did not have a Master Association in place.

Interestingly, Condo1 was approved with FHA just over two years ago AND the reviewer at FHA that rejected Condo1 approved Condo2 about 18 months ago. The same insurance policy has been in place the entire time.    Maybe it was OK then, but it’s not OK now…?

I asked that the reviewer speak to his supervisor about it.  Apparently, my request for a second set of eyes made its way to HUD Headquarters in Washington DC.  I received an email about a week later notifying me that HQ said:

“[Name removed] from Washington informed us we cannot accept Pooled policies from unaffiliated associations. I can only accept a policy with a Master Association that has it covered within their by-laws, otherwise the association must have its own policy.”

I would expect that this information will be conveyed to all of the FHA condo project reviewers in all of the Homeownership Centers if it has not been already.  Typically, when an event like this happens that hits HQ in DC, it is broadcast throughout the HOCs via conference call or training/update.

These two associations must now segregate their policies if they wish to maintain their approvals with FHA.  Or create a Master Association which is highly unlikely.

If you are working with associations that have pooled policies like this and they wish to gain or maintain their approvals with FHA, please contact me if you have any questions.

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

USDA Purchase Loans for Condo Units

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imphot_3Probably the most under-utilized purchase loans for condominium units are those insured by the USDA.  Like the VA and FHA, the USDA Rural Development (RD) program is a home loan insurance that allows the financing of condominium units.

One of the most important criterion for use of this program is that the loans are only available in areas in which the USDA deems to be “rural”.  A rural area is one in which the population is 35,000 or less.  The USDA does not go by towns, it uses census tracts which can allow use of the RD program in part of a town but not the rest.  To know if the condo unit is in an eligible census tract, you can follow this link and click on the Single Family Housing link under Property Eligibility on the left of the page.

The RD program also has maximum income limits for its use and is a computation based on the number of dependents, disabled persons and persons aged 62+ that are living in the household.  The calculation also takes into account the county of the property, annual child care expenses and all income earned by adults in the home (not just the borrowers’ incomes).  You can use the link above and click Single Family Housing under Income Eligibility and use the worksheet to determine eligibility.

Unlike FHA and the VA, the USDA does not maintain its own approved condominiums list.  For a condominium unit to be eligible for RD financing, the project must be on the approved condominiums list of FHA, the VA, Fannie Mae or Freddie Mac.

Where this becomes interesting (at least to me) is when dealing with new construction projects.  FHA, the VA and Fannie/Freddie have different pre-sale requirements for new projects and their calculation.  FHA has the lowest pre-sale only requiring that 30% of the units be sold or pending sale.  Fannie/Freddie have a 50% pre-sale requirement and the VA says that 70% of the total number of units must be sold.

Therefore, for new construction in rural areas, it would make good sense to get approved with FHA to allow the use of the RD program as well.  The USDA does not have a maximum RD loan concentration limit; FHA caps its loan concentration in new projects to 50%.  Thus, after 30% of the units are sold, 50% can be financed with FHA and the rest with the RD program.  This is very important for developers to know when constructing in rural areas.

For more information about USDA’s requirements for condominium projects, you can access the Administrative Notice released by the USDA in 2007.  [The form does need some updating with regards to the pre-sale requirement.  The percentages that are listed above are accurate as of 4/17/15.]

Or you can contact Eric Boucher at AskEric@readysetloan.com

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

USDA Rural Housing Program Maps

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USDA_logo

The USDA determines the eligibility of an area based upon census data and sets a maximum population limit.  Until the 2010 census data was released, it was using the 1990 and 2000 census data and had set the maximum population for the area at 25,000.

I say “area” and not “towns” because it doesn’t go by towns; it uses census tracts.  It is possible for a town or small city to have more than one census tract and that one census tract in a town may be eligible while another may not.  This is true of Waterford, CT.  Nearly the entire town is eligible except the eastern side near New London.

In 2013, the USDA announced the updated census tracts that would be eligible based upon the newest census data from the 2000 census.  In many states, including my state of Connecticut, this would have effectively reduced the eligible areas by nearly one half.  This created tremendous uproar from housing organizations and the USDA decided to postpone the implementation of the new maps.

The Agriculture Act of 2014, H.R. 2642 (The Farm Bill) modified section 520, which refers to the Rural Development loan program.  The modification included the use of the 2010 census data but increased the maximum population from 25,000 to 35,000.  This modification will ensure that the eligibility maps will stay generally the same as they have been for the past 10+ years.

condo1It was also announced that any area that was deemed a Rural area as of 9/30/2014 will remain eligible until 9/30/2014.  Currently, only the areas that transitioned from ineligible to eligible are available on the map.  The USDA noted that a preview of the complete map (including the areas that will become ineligible) will be available for preview during the summer, ahead of the 9/30/14 changes.

To view a map or to verify if a home is located in a Rural area, you can follow this link (http://eligibility.sc.egov.usda.gov).  On the left toolbar, click on “Single Family Housing” under the heading of “Property Eligibility”.  Click Accept on the page that follows and you will be taken to the map.  You can type in the exact address or the town or the state (although the system will “bark” at you for the last two.)

You may be wondering why someone like me who helps condominiums to obtain their FHA condo approvals is concerned with the USDA Rural Development maps.  And I would say that is a great question.

The USDA RD program does allow for loans for condo units.  In order for a condo unit to be eligible for USDA financing, it has to be in a Rural area and the condominium project has to be on the FHA Approved Condominium List.  Therefore, no FHA condo approval – no USDA financing.

While most of the condominium projects with whom I work are not in Rural areas, there is a large percentage that are and having the ability to attract USDA RD loan buyers is very important.

USDA logo courtesy of the USDA

Can Our Condominium Get FHA Approved Before Construction?

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elenathewise_3Recently, I received a call from a developer in California who asked me at what point during construction is a condominium eligible for an FHA condominium project approval.  She has a condominium approved for development by the city but ground had not been broken as of yet.  She said that she had spoken with other project consultants and FHA and had received conflicting information.

In speaking with FHA, she was told that proposed projects can be approved prior to construction and are approved at this stage quite often.  Projects do not need to be complete or even have phase completion to be approved.

In speaking with the other project consultants, she was told that the first phase of the project – or at least some units – must be completed in order to get approved with FHA.

I ran into a similar situation back in 2010 when I was working with the developer of a new condominium project.  Back then, I was told by FHA that it does allow project approval even before construction has begun and I have found this to be true in practice.

In addition, if the project is approved before construction, once they are built, completed units would have to be annexed to the project approval in FHA’s system before they are available for FHA unit financing.  Only those units that are noted in FHA’s system would be eligible for financing provided that all other requirements are met.

While the project may be eligible for approval, FHA loans are not available in the project until the loan-level requirements have been met.  Besides the project-level requirements FHA has for condominiums to get on its approved condominiums list, loan-level requirements must also be met when a borrower is applying for a loan.

A proposed new construction condominium project can meet the project-level requirements to get on the FHA Approved Condominiums List even before any of the units have been built.  But FHA will not allow unit financing until the completed units are annexed AND 30% of the units in the current legal phase have been sold or are pending sale and at least 50% of the sold units are owner-occupied.  [There are other loan-level requirements.]

The developer was thrilled to learn of this and said to me “I have spoken to a lot of people and you are the first person who could explain this to me in a manner which I could understand.”

I was just pleased that I was able to clear her confusion.

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

Condo Unit Financing Almost Killed Due to Reserve Contribution

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gstockstudioLast week a loan officer contacted me regarding a loan he had in  process.  At the 11th hour, the lender was rejecting the conventional (Fannie Mae) loan based on the association’s contribution to the reserve account.  According to the underwriter, the association was contributing less than 10% to the reserve account; the contribution was $6,400 short by their calculations.

He asked for my input.

After reviewing a copy of the budget, I wrote down some points for my friend to bring to the attention of the underwriter.

The first of which was that the underwriter was calculating the percentage using the total amount of annual income.  This included a line item called “Rollover from 2014”.  This is not actual income to the association; it is a transfer of equity funds from the operating account consisting of accumulated funds from previous years.  Thus, it should be removed from the calculation.

In addition, there was income listed from the rental of an office space and of storage units.  These are not common charges and should also be removed from the calculation.

There is a special assessment called a “Garage Fee” listed as income and an expense of the same amount labeled as “Garage Reserves”.  The underwriter was using the income in the calculation but was not including the expense towards Garage Reserves citing that those funds “spoken for”.

I posed that special assessment funds are not to be included in the calculation unless they are charges to specific unit owners that are common every year.  And, if the income is to be included, so should the Garage Reserves contribution because it is going into a fund that will pay for the replacement/repairs of the garages, aka, common elements.

After forwarding my rebuttal to the underwriter, my friend replied that the lender had done an “about-face” and approved the condo’s budget.

This loan almost didn’t happen because the underwriter was not completely familiar with Fannie Mae’s guidelines.  How many other loans have been errantly rejected for this same reason?

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

Can We Use Reserve Funds to Offset Excessive Costs From This Winter?

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oneponyThis tough winter in the northeast is sure to impact condominium associations’ budgets.  From experience, condominium associations don’t typically budget for exceptionally bad winters but, rather, they estimate based on an average of previous years.  What happens when their winter expenses exceed the budget and how would this impact their ability to get certified with FHA?

Yesterday, we received a call from a property manager with whom we worked last year to help his condominium client get approved with FHA.  Due to the condominium’s financial statements, we really had to jump through some hoops to obtain the approval.  It’s apparent from his questions that he wishes to avoid issues in the future.  [Kudos to him for being proactive!!]

He called because this awful winter has negatively impacted the association.  So far, they are $20,000 over budget for snow removal, roof raking and damage caused by ice damming.  And it’s only February!

They have to use reserve funds to cover the overage and he had two questions for me: will using reserve funds cause problems for recertification in two years and should they special assess to replenish the money used from reserves?

Using reserve funds will not necessarily impact the ability to get recertified with FHA.  This is an unusually bad winter and I would expect most condominiums in the northeast will be over-budget on winter-related expenses.   FHA will understand this so we can explain this away.  However, FHA will also investigate how the association has dealt with this situation and what steps, if any, the association has taken to prevent this in the future.

It should be noted that the reserve account balance should not dip below 10% of the annual budget.  Luckily for this association, they have sufficient funds available to them to not cross this threshold.

That leads to his second question.  If they take the money out of reserves, it would be wise for them to make an adjustment to try to replenish these funds or at least a good portion of them.  A special assessment would be a good way to do so.

If they don’t do anything to replenish the reserve account, it will be noted that the balance isn’t where it should be as compared to the previous balance when it was approved with FHA.  If they had $30,000 in the account in 2014, contribute $10,000 per year and two years later they have $30,000 in the account…where did the money go?  And, more importantly, what steps has the association taken regarding this loss?

The financial component of the FHA approval is the most subjective.  However, if the association has a history of dipping into the reserve account to cover frequently under-budgeted items, the FHA reviewer might construe this as financial mismanagement.

Also, if the association is funding the reserve account and its balance is not increasing year-over-year, FHA may request that a reserve study be completed as a condition for approval.

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