Law Offices of David L. Rudolph, P.C.: Practicing Real Estate Law, Condominium Law, Business Law and Litigation in Chicago, Illinois.

Condominium Law

FHA Approval for your Association:

All associations should be aware of recent changes in the FHA loan program implemented by the Department of Housing and Urban Development (HUD). I believe these changes will have a major impact on the ability of owners to sell their condominiums, and thus will ultimately affect the financial health of your association.

In 2006, less than 2% of residential mortgages were FHA insured. Presently, that number has risen to more than 50% of new mortgage loans. With stricter FannieMae lending guidelines, many in the industry expect FHA's market share will soon increase to more than 75% of the residential mortgage market.

However, under the new guidelines effective February 1, 2010, the process by which an association becomes FHA approved has become much more complicated and time consuming.  Specifically, the new FHA guidelines have eliminated the spot approval process.  If an association was not already FHA approved, the "spot approval" process was commonly used by mortgage lenders to secure FHA financing for their individual borrower client.  However, under the new guidelines, the association must have full FHA approval before any borrower can secure a loan.

The current problem (and potential crisis) is the existing backlog in the application process with this federal agency. Before the new guidelines went into effect, the approval process would take several weeks. The FHA website currently states that the approval process will take approximately 30 business days.  With the new guidelines, there will likely be an even greater backlog in the coming months. There are only four HUD offices nationwide that simply do not have the staff and infrastructure to timely handle the volume of applications that is expected. This delay can then jeopardize an owner's efforts to sell his or her condominum unit to a potential FHA buyer/borrower.

An unapproved association can certainly wait for a lender to start the process. I have spoken to mortgage lenders that charge a reduced fee to handle the application process in order to get their individual borrower approved.  However, these lenders typically rely on the association or property manager for the bulk of information gathering and document preparation. In addition to the delay concern mentioned above, another important consideration is that if the lender's application has an error, the entire association can be bound by that mistake.

As such, I recommend that condominium associations be proactive in securing FHA approval or reapproval now. (Under the new guidelines, HUD is now requiring associations that are already FHA approved to reapply every two years to retain their status.)