This post is one of a series about 10 Most Common Misperceptions About Condominium Laws And Operations, which I presented at the Maine Condo Forum and Expo in Portland, Maine, on September 25, 2010.
The secondary mortgage market, which is the middleman for the sale of mortgages from banks to investors, collapsed two years ago, along with the collapse of the housing market. This led to a classic overreaction by regulators, resulting in new, onerous requirements and more strict compliance with existing rules for financing condominium units. As a result of this, many condominium purchasers turned to the Federal Housing Administration loan guarantee program. Unfortunately for these buyers, the FHA has tightened its eligibility requirements as well. Association actions and policies do have a major effect on the ability of owners to sell or refinance. Some examples of troublesome Fannie Mae (FNMA) and Federal Housing Administration (FHA) rules are below. Note that these rules change frequently and the listings below may become obsolete.
-FHA: “Spot loans” eliminated or scaled back.
-FNMA and FHA: Non-owner occupancy of more than 50% of units may disqualify all units from loan approval.
-FNMA and FHA: Fidelity insurance required for condos with more than 20 units.
-FNMA: Unit owners must obtain their own policies (HO-6) in some cases.
-FNMA and FHA: no more than 10% of units may be owned by a single person or entity.
-FNMA and FHA: at least 10% of budgeted income must be designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible. Can get exception where unit owners are responsible for maintenance. A satisfactory reserve study less than 12 months old will meet FHA standards.
-FNMA and FHA: no more than 15% delinquency (more than 30 days past due) on condo assessments.
Recommendation: Consider changing your documents to require fidelity insurance. Consider requiring unit owners to obtain their own policies (HO-6). Consider setting a ceiling of non-owner occupants at 50%. This is complicated and sometimes politically difficult, but legal. Include 10% of your operating budget for reserves in your next budget, or if you think you don’t need this amount, have a reserve study conducted. Be aggressive about keeping the 30 day delinquency below the 15% threshold. Finally, if your condominium is a large one, consider obtaining FHA project approval for your condominium (one estimate says this might cost $3,000-$5,000).