FHA Certification and Recertification
Takeaway: FHA certification makes it easier to sell units in your condominium association. Applying for FHA certification has become more straightforward recently.
What is the FHA certification program? The Federal Housing Administration will insure certain mortgage loans on condominium units in a certified condominium association. Obtaining FHA certification, so units can be sold to FHA approved buyers, is an attractive benefit for buyers and also permits selling unit owners to market their units to a greater pool of potential buyers. The FHA program permits buyers to put down as little as 3.5% as opposed to the typical 20%. The lower down payment attracts many first-time buyers, who still must meet separate FHA approval requirements on their own.
Certifying a condominium association: No single unit can receive FHA finance or refinance unless the entire condominium association has been approved. The days of “spot approval,” where an individual unit could receive its own FHA approval, are long gone. A condominium association can receive certification issued either by an FHA staff member through the HUD review and approval process (also known as HRAP) or by an FHA-approved mortgagee through the direct endorsement lender review and approval process (also known as DELRAP). The HRAP option is by far the most common, and this is the where the condominium association, through its managing agent, board of directors, outside third party servicer, and/or attorney, prepares the certification application by answering all questions listed on HUD's certification cover letter/document and providing all requested documentation.
Renewing your certification: FHA certification must be renewed every two years. It is important for condominium associations to monitor the expiration date since the FHA will not notify you that the certificate is about to expire. Condominium associations must recertify no earlier than six months before the expiration date and/or no later than six months after the expiration date. In the event there is a lapse, the certification process is identical to the recertification process.
What the association needs to be certified: In the fall of 2012, the Federal Housing Administration revised its condominium project approval guidelines, which modified and supplemented the previous requirements contained in Mortgagee Letter 2011-22. These revisions are contained in Mortgagee Letter 2012-18 and will be effective until August 31, 2014.
- What has not changed: The association needs to submit:
- Its delinquency rate
- Its investor-to-owner ratio
- Proof of the association's fidelity bond coverage
- Explanation regarding any special assessments and/or pending litigation involving the condominium association
- Its recorded governing documents, current budget, reserve account balance, FEMA flood map, management contract, and insurance declaration page
- New requirements:
- Mortgagee Letter 2011-22 previously placed a cap of 25% on the total commercial space permitted to be in an FHA approved project; the 2012 Mortgagee Letter now permits FHA to consider projects with commercial space between 25% to 35%
- In addition, mixed-use condominiums with commercial space up to 50% will also be considered, but substantial, additional documentation will be required
- Under the 2011 Letter, no more than 15% of units could be more than 30 days past due; the 2012 Letter allows 15% of the units to be as much as 60 days past due
- Fidelity bond coverage for the condominium association's managing agent is now required
- Previously, the signor of the FHA certification application had to certify that he or she “is under a continuing obligation to inform HUD of any material information compiled for the review and acceptance of the project is no longer true and correct.” The new standard is less cumbersome: the signor has to certify only that he or she has “no knowledge of circumstances or conditions that might have any adverse effect on the project (including but not limited to defects in construction; substantial operational issues; or litigation, mediation or arbitration issues).” Although the “continuing obligation” requirement has been removed from the certification, the signor is still certifying that he or she is not providing any knowingly or willfully false, fictitious or fraudulent statements. A person doing so will be fined not more than $1 million or imprisoned for not more than 30 years or both.
If members of the board and/or managing agents of a condominium association have any questions regarding FHA certification or recertification, please contact your Whiteford, Taylor & Preston community association attorney for assistance.