On November 13, 2015, HUD released a new Mortgagee Letter (ML) in response to pressure from industry professionals and trade groups. The new ML has revised the current FHA Recertification process, redefined owner-occupants, and clarified insurance requirements.
For the purpose of this article I will go through the changes and how they will impact Condominium Associations.
Streamlined Project Recertification
Change: There is a now a 12-month window of time to submit a recertification application using a new streamlined process. The window begins 6-months prior to the expiration date and extends 6-months post expiration. During this window the legal documents (governing documents that were required for the initial submission), as well as a few other documents are not required to be submitted with the application.
Impact: Overall, this change will have little to no impact on Condominiums. However, the change will, in fact, add additional liability to the submitter. The “Appendix A” form requires the submitter to attest to the fact that the governing documents adhere to the current FHA Guidelines. With this change, HUD will not be doing additional reviews and the liability will be shifted solely to the submitter. HUD has had a history of changing the interpretation of the guidelines over time and it will be up to the reviewer to ensure that the governing documents still adhere to current guidelines.
An anticipated benefit to these changes is that the turnaround time from HUD may be quicker now for re-certifications, however that remains to be seen.
Owner Occupancy Percentage
Change: The definition of “Owner-Occupied” has been revised to clarify the FHA’s stance on secondary homes. Secondary homes can now be counted as owner-occupied units if they meet the requirements set forth in HUD handbook 4000.1. This basically states secondary homes may be viewed the same as a primary residence, as long as the home is not used as a rental, listed for rent, for sale, or under contract to a buyer who intends on using it as a rental.
Impact: This will have a positive effect on communities that have large “snowbird” populations. Prior to this change, the second home was counted in the non-owner occupied category, which had a negative impact on many communities seeking FHA approval. A community must maintain at least 50% owner occupancy to qualify for FHA certification.
Acceptable Insurance Coverage
Change: HUD has expanded the types of insurance acceptable to include co-insurance, pooled insurance, and state run plans.
Impact: Overall, as a full time consulting company, we rarely encounter associations with this type of insurance. It will likely help associations that have these types of policies; however, as a change it is unlikely to have a big impact on the amount of FHA approvals in the United States.
Talk in the industry seems to indicate that Florida condominiums will receive the largest benefit from these guideline changes. This is due to the large number of Florida condos with co-insurance and state run plans. Many Florida condo communities also contain many secondary homes. This does not address another major issue in Florida, which is the general lack of reserve funding, and there is no indication of that requirement changing.
These guideline changes became effective November 13, 2015 and will expire in one year, unless they release an amendment that extends the timeframe or implements a new rule change.
For more information on FHA Approval:
CAI-CLAC has compiled a number of resources for community associations to learn about the importance of being a FHA Approved Community and how management can go about submitting for approval. Check out these resources here.
Natalie Stewart is President of FHA Review. Ms. Stewart also posted in the CLAC blog on a similar topic last year, “Tips for Getting Your Community FHA Approved”. You can reach Ms. Stewart directly by emailing her at Natalie@fhareview.com.