New Lending Rules Continued - HUD Requirements

You will remember from a recent posting that we discussed the new Fannie Mae guidelines, and the anticipated HUD regulations. As noted,  HUD did in fact adopt new temporary regulations that went into effect on December 7, 2009, and remain effective until December 31, 2010, at which time the new permanent HUD regulations will become effective. The new HUD temporary regulations are found in HUD Mortgagee Letter 2009-46 A, and can be found  here. The new HUD permanent regulations are found in HUD Mortgagee Letter 2009-46 B, and can be found here. It is important to note that condominium projects under developer control and under construction or being converted have different standards. This posting does not address those standards.

First, we will address the permanent regulations that become effective after December 31, 2010, as the temporary regulations embody those regulations with certain requirements being relaxed. The following requirements apply to all condominiums (consisting of 2 or more units) to be eligible for HUD financing:

          At least 50% of the units of a project must be owner-occupied or sold to owners who intend to occupy the units.

          No more than 10% of the units may be owned by one investor.

          Projects must be covered by hazard and liability insurance and, when applicable, flood and fidelity insurance.

          No more than 15% of the total units can be in arrears by more than 30 days in payment of their assessments.

          No more than 25% of the property’s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogeneous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.

          Budget Review — Lenders must review the Association’s annual budget and determine that the budget is adequate, and includes allocations to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and provides adequate funding for insurance coverage and deductibles.

          In cases where the budget documents do not meet these standards, the Lender may request a reserve study to assess the financial stability of the project. The reserve study cannot be more than 12 months old.

          Projects of 3 units or less will have no more than one unit with mortgage insured by FHA.

          Projects of 4 units or more will have no more than 30 percent of total units with mortgages insured by FHA.

In addition, project approval must be obtained every 2 years; in addition to other requirements, consideration will be given to: (1) pending special assessments; (2) pending legal action against the association or directors or officers; and (3) adequate insurance requirements being met.

Under the temporary regulations, the following restrictions apply:

          Project concentration of FHA insured loans temporarily increased to 50% (from 30%), and under certain conditions can be increased to 100%.

          Owner occupancy ratios are still 50% that must be owner-occupied or sold to owners who intend to occupy the units. However, vacant or tenant-occupied real estate owned, including properties that are bank owned may be excluded from the calculation of the required owner-occupancy percentage.

As noted previously, there are other requirements as well. However, these are the provisions that, in our experience, have the potential to most significantly affect an existing condominium community. Associations will need to make sure that they comply with these requirements, and that their governing documents address them, so as to maximize owners’ ability to sell their homes. Please call us if you need assistance in gaining compliance with the Fannie Mae guidelines or HUD regulations.