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  • Condominiums that have been Rejected or Withdrawn in the previous 12 months.  If a condominium has been Rejected or Withdrawn either through HRAP or DELRAP, the project must be submitted to HUD for approval/reconsideration.

3 Myths About FHA Loans Condominium Associations Must Know

imphot_2The FHA loan program is a balancing act to remain competitive in the market, mitigate risk to its insurance fund and fill the niche role for which it was designed.  FHA loans have changed a great deal even since I began my career as a loan officer in 2001.  This is not your father’s FHA loan!

FHA Loans are NOT Low-Income or Affordable Housing Loans

This is a common misconception about FHA buyers that we run into frequently.  Because the Federal Housing Administration (or FHA) is a division of the Department of Housing and Urban Development (HUD), people associate FHA loans with low-income loans, subsidized “Section 8” housing and Affordable Housing programs.

This is not the case.

In order for a buyer to qualify for an FHA loan, he/she has to meet income guidelines that are nearly the same as “conventional” Fannie Mae loans.  FHA does not provide subsidies for these loans; the buyer has to qualify on his/her own merit.

FHA does not have minimum or maximum income limits and only verifies if the buyer earns sufficient money to meet his/her financial obligations.

More than 20% of FHA’s loans are in excess of $200,000 and nearly 40% are in excess of $150,000.  “Low-income” borrowers would not qualify for loan sizes this large.

FHA Loans are Not for People with “Bad Credit”

FHA has always been more lenient with its credit-qualifying criteria than Fannie Mae – this is one of the niche areas for which the program was designed.  But it does not offer loans to folks with “bad credit”.  In fact, roughly 25% of FHA borrowers have credit scores of 720 or better; these are commonly referred to as “Tier 1” or “A+” credit ratings.

Like Fannie Mae, FHA has minimum credit requirements and an automated underwriting system.  In order to qualify for a loan, buyers must meet FHA’s credit standards, which have become stricter since 2007.  There are two primary differences between FHA and Fannie Mae:


  • FHA will allow borrowers with no credit scores.  FHA understands that there are folks who choose to not use traditional credit such as car loans and credit cards.  Instead, they run on a cash system.  If this is the case, these folks would not have credit scores.  Instead, FHA examines the buyers’ non-traditional credit by obtaining letters of payment history from other sources such as electric companies, insurance companies, rent receipts, phone companies, etc.  These buyers are examined very closely by the lender.
  • Fannie Mae does not allow loans to buyers who are not approved by the automated underwriting system; FHA will if it can be shown that the buyers meet FHA’s credit standards.  FHA understands that life-changing events occur which can affect a person’s ability to pay their bills.  Such “life events” include car accidents, serious illness or fire.  If it can be shown that a life event was the cause of the low credit rating AND that it is unlikely to occur again (e.g. the illness is cured or won’t return) then FHA may still approve the loan.  Again, the buyers are very closely examined by the lender.

The FHA Loan Process is Not Tedious

I just had this conversation with mortgage loan officers yesterday.  They mentioned that many real estate agents – even very good agents – still hold on to the idea that the FHA loan process is more tedious and takes longer to close than conventional loans.  One loan officer noted to me that his lender is closing FHA loans in less than 30 days.

This misconception is lingering from the days when FHA appraisals typically found faults in the home that required curing prior to closing.  FHA appraisers were required to to complete a Valuation Conditions (or “VC”) sheet as part of the appraisal.  It was a checklist for the appraiser to search for defects in the property.  This form was removed as a requirement in 2005 making an FHA appraisal virtually the same as one for Fannie Mae.

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

FHA Condo Approvals – Impact of Affordable Rental Units

photo5A recent inquiry that I received was regarding the impact of Affordable Rental Units on an FHA Condo Approval.  The real estate agent that contacted me was troubled because her buyer’s loan was denied by the lender because there are Affordable Rental Units in the condominium project.

Obviously, if the loan got this far, the project must already have been approved with FHA – and it was.  The underwriter was denying the loan because he was claiming that the owner-occupancy rate was too low (below 50%).  The problem was that he was using the Affordable Rentals in his calculation of this ratio.  According to FHA, Affordable Rental Units are exempt from this calculation.  In this case, removing these units from the calculation would result in an owner-occupancy ratio of greater than 50%.

I recommended to the real estate agent that the loan officer communicate with the underwriter’s supervisor.  All major lenders have in-house condominium specialists who are experts on FHA’s guidelines.  If they don’t know the answer to the question, they can contact the jurisdictional Home Ownership Center (HOC) and ask the question.

When Affordable Housing Units or Rentals exist in a condominium project, the project must meet additional criteria:

  • The Affordable Units or Rentals must be mandated by a governmental entity – state, county or local ordinance – or by an eligible nonprofit organization that meets the requirements of CFR 203.41(a)(5).
  • The Affordable Units or Rentals must be specifically named in the legal documents by unit numbers.  The documents are not permitted to simply state “10 units”.  They must say “Unit X, Unit Y, Unit Z”, etc.
  • The Affordable Housing language must meet the criteria set forth in 24CFR203.41.  Although it must meet all of the requirements as dictated by this Section, one specific item to pay attention to is that the Affordable Housing restriction automatically terminates if title passes to HUD/FHA.

When a condominium project is approved with FHA, the Affordable Units and Rentals are noted in the system (FHA Connection).  If the Affordable Housing language in the condominium’s legal documents are acceptable to FHA and meet 24CFR203.41, those units would be eligible for FHA financing.  If they are not acceptable, they will be noted in the system as not being eligible for FHA financing.

This is an example of a “common sense” approach by FHA to carve out the unacceptable Affordable Units and allow for a project approval.  Prior to March 2011, if an Affordable Housing clause existed in the project’s legal documents, the entire project was deemed to be ineligible for project approval, and, therefore, FHA financing would be outright disallowed.