By Sandra L. Gottlieb, Partner, SwedelsonGottlieb
Now that the “spot loan” approval process (which allowed for on-the-spot FHA approval of an association for the benefit of a buyer) has been eliminated, it is only possible for an owner or prospective purchaser of a condominium to obtain an FHA-insured loan if the association is or becomes FHA certified. This leads to the question of what, if anything, California community associations should do to obtain FHA certification. FHA certification is effective for two years, after which time the association must be recertified, although it is worth noting that the certification process has changed so frequently that there is no guarantee that the same certification requirements will be in place two years from now.
Becoming FHA certified can benefit the association by making its units more marketable and enabling refinancing, thereby potentially reducing foreclosures and vacancies. As lenders are becoming more cautious, FHA loans are becoming significantly more common, and, therefore, the importance of FHA certification is increasing. This does not mean that boards should spend their time and their association’s resources seeking approval. Depending on the circumstances and the authority given to the board by the association’s governing documents, the association may choose to initiate the process, particularly if the association has taken title to any of the units through foreclosure and/or if difficulty obtaining loans has been a recurring problem affecting numerous members of the association. If the association initiates the FHA certification process, it can expect to spend approximately one to two thousand dollars on an outside consultant/specialist. Depending on the association’s bylaws, the board may designate the task of obtaining FHA certification to an executive committee of the board.
Typically, however, the purchaser or refinancing owner who wants the FHA loan should be responsible for taking the reins at their cost and expense. If the association’s units generally do not have a problem with marketability or if only a single homeowner is interested in obtaining FHA certification, then unless the association’s governing documents impose a duty to do so, the board has little authority to expend the association’s resources on this process. Regardless of who initiates the process, the end result, if successful, is that the association becomes certified. The association will be asked to provide certain information to the prospective lender, which it may do. However, the person filling out the paperwork must avoid certifying or guaranteeing information of which they are not certain. Anything other than the most basic facts should be qualified with “to the best of my knowledge.”
In order to be eligible for FHA certification, the association must meet certain qualifications. Some are static; for example, no more than 25% of the total square footage of the development can be used for commercial purposes, and no more than 10% of the units can be owned by the same investor. If an association fails any of these tests, not much can be done. FHA has temporarily increased the percentage limit of units in an association that can receive FHA financing from 30% to 50%, and it may even be allowed to reach as high as 100% if certain further conditions are met. This temporary increase applies through June 30, 2011.
There are other requirements that the association can actively strive to fulfill in order to achieve FHA certification. One easy requirement is that the association must carry specified insurance. The association’s insurance agent can tell you if the association has adequate insurance or what the cost would be of obtaining the required insurance. Another test that is typically not difficult to meet is that 10% of the association’s regular assessments should be going toward the reserves. Failure to meet this requirement will not necessarily disqualify the association but sparks further scrutiny. If there is room in the budget, this is not an unreasonable qualification to meet, and unless the reserves are fully funded, it is not a bad idea, regardless of your FHA eligibility.
The requirement that no more than 15% of the association’s units can be more than 30 days past due on assessments seems like something that is difficult to change; however, if the association does not currently pursue collections diligently, it will find that through strict enforcement, it can significantly decrease the delinquency rate. Just like reserve fund contributions, increasing collection efforts is a good idea regardless of your FHA status. Another more complicated requirement is that at least 50% of the association’s units must be owner-occupied. If you are close to this percentage or heading in this direction, one may consider amending the CC&Rs to add a rental restriction.
When faced with the prospect of obtaining FHA certification for an association, there are several questions to ask: Is doing so in the best interests of the association? Does the association meet the basic, unalterable requirements? Is there an owner or prospective owner who is willing to lead and pay for that process, or does the association have a strong reason for initiating the process itself? If the answers are yes, it may be worth putting in the effort to meet the final requirements and achieve FHA eligibility. Of course, it is always advisable to have the association attorney review any documentation you prepare before submitting it to the lender.
Questions? Contact Sandra Gottlieb, Senior and Founding SwedelsonGottlieb partner via email: slg@sghoalaw.com