For some home buyers, financing the purchase of their new home can be a barrier to entry. Many home buyers need the benefit of an FHA backed loan for their lower interest rates. The Federal Housing Authority (FHA), a part of the Department of Housing and Urban Development (HUD), has provided mortgage insurance on loans made by FHA-approved lenders since its inception in 1934. Until a recent FHA rule change, any buyer interested in purchasing a condominium unit backed by an FHA loan faced the additional hurdle requiring that the condominium project itself must be FHA approved.
The FHA approval process for condominium projects can be complex and time-consuming. Prior to the recent FHA rule change, if the condominium project was not approved by the FHA, then prospective condominium purchasers could only obtain conventional loans, making it more difficult to secure financing. In fact, according to the FHA, only 6.5 percent of the country’s more than 150,000 condominium projects are approved to participate in the FHA’s mortgage insurance program. However, a new FHA rule that goes into effect on October 15, 2019 will change the approval process for condominium units and allow more buyers to receive approval for an FHA loan.
The new rule introduces several changes to the FHA approval process. The most notable is that the FHA will now allow an individual condominium unit owner to be eligible for an FHA backed mortgage even if the condominium project as a whole is not approved. However, the FHA will only approve a limited number of units in any condominium project. For projects with 10 or more units, no more than 10 percent of the individual units can be FHA-insured, and for projects with fewer than 10 units, no more than two individual units can be FHA-insured. Board members, owners, managers, and anyone else can access HUD’s database to find the number of FHA backed loans in a condominium project at https://entp.hud.gov/idapp/html/condo1.cfm.
The following are some of the essential requirements for a condominium project to be FHA approved, which have not been changed by the new rule:
- The condominium project must consist of two or more units
- No more than ten percent of the units can be owned by one investor or entity in a project with more than 10 units. In a project with 10 or fewer units, an investor may not own more than one unit. Unsold units are not considered investor-owned.
- No more than fifteen percent of the total unit owners can be in arrears of association fees.
While the FHA allows limited restrictions on leasing, a condominium project will not be approved if the declaration or by-laws require that a prospective tenant be approved by the association. However, the association may require leases to be in writing and subject to the declaration and by-laws of the condominium, request a copy of any sublease and the name of all tenants who will occupy the unit, and establish a maximum allowable lease term and maximum number of rental units within the project. The FHA leasing requirements are the same for condominium and homeowners associations, but the new rule changes apply only to condominium associations.
The new FHA rule requires that approved condominium projects have a minimum of 50 percent of the units occupied by “owners” for most projects. In 2015, the FHA clarified that a condominium unit is considered to be owner-occupied provided that it is not: (i) tenant occupied, (ii) vacant and listed for rent, (iii) vacant and listed for sale, or (iv) under contract to a purchaser who does not intend to occupy the unit as a principal residence or secondary residence. For approved projects, the FHA will insure up to 50 percent of the units in the project.
The new FHA rule has extended the allowable amount of commercial/non-residential space for an approved condominium from 25 percent to 35 percent of total floor space. It also extended the re-certification deadline for approved condominium projects from two years to three years. An approved condominium project may request renewal of its approval by submitting a request no earlier than six months prior to the expiration or no later than 6 months after expiration of the approval.
Getting your condominium project approved by the FHA allows more buyers the opportunity to purchase units in your community utilizing FHA backed loans. However, the approval process is complex, and may require that your declaration and by-laws be amended to conform with FHA requirements – most especially in regard to leasing. Each association will have to balance the benefit of FHA backed loans versus having lease approval powers. If an owner’s neighboring tenant turns out to be previously convicted of rape, murder, or other heinous crime, then there is a great probability that such owner would have preferred stringent lease approval requirements as compared against providing for FHA backed loans in the community. Your association’s legal counsel can be of great benefit in navigating issues concerning the FHA approval process.
Jeffrey Rembaum, Esq. of Kaye, Bender, Rembaum attorneys at law, legal practice consists of representation of condominium, homeowner, commercial and mobile home park associations, as well as exclusive country club communities and the developers who build them. He is a regular columnist for The Condo News, a biweekly publication and was inducted into the 2012, 2013 & 2014 Florida Super Lawyers. He can be reached at 561-241-4462.
The complaint heard often from condominium and HOA board members is in regard to the influx of assistance animals in their “no pet” or pet restricted communities. Few other topics within the body of community association law cause more consternation then the application of the Federal, State and local Fair Housing laws. In fact, one relatively minor misstep from a board member or manager can cost an association tens of thousands of dollars in damages, as well as attorney’s fees and costs. Not only that, but this is one of the very few areas where board members could potentially face individual liability for their actions. Under most circumstances, board members will have protection from liability under the “business judgment rule,” but this is not necessarily the case in the Fair Housing arena.
Unregulated, commercial short-term rental operators are threatening Florida community associations by spending millions of dollars to push for legislation that would force short term rentals into neighborhoods in violation of adopted deed restrictions meant to protect the rights and home values of the homeowners.
A good reason why society provides for prevailing party attorney fees and costs is to make a potential plaintiff think twice before filing a lawsuit. Imagine being able to sue your adversary in court without worry that if you lose you will NOT have to pay prevailing party attorney fees and costs to the other side. Such a situation could lead to an avalanche of lawsuits, and that is exactly what happened when Florida laws permitted contractors holding an “assignment of benefits” in their favor, who were unhappy with the award from the insurance company, to sue the insurance company with nothing to lose but to pay for their own attorney. Simply put, an assignment of benefits is an agreement transferring a homeowner’s insurance benefits to a contractor who may then file a claim against the homeowner’s insurance policy without the involvement of the homeowner. Notwithstanding the assignment of benefits, the homeowner is still responsible to pay the insurance premium and deductible. If the contractor then makes a claim against the insurance policy and is unhappy with the insurance proceeds received, the contractor can sue the insurance company with no threat of having to pay prevailing party attorney fees if the contractor lost its lawsuit against the insurance company. Without the fear of a prevailing party attorney fees award, these types of lawsuits became very prevalent. Insurers claim that this led to ever increasing insurance premiums. Not anymore!