On July 29, 2016 the “Housing Opportunity Through Modernization Act” (“HOTMA”), was signed into law by President Obama. After several years of complaints by housing, community associations, and realtor groups about the FHA’s overly-burdensome restrictions on condo financing (such as requiring complicated re-certifications of entire developments every two years, and government approval of condo associations’ finances, reserves, insurance, budget and other items), this Act brings significant reforms to the Federal Housing Administration (“FHA”) condominium loan program.
For years FHA used to allow so-called “spot” loans on individual units – but no more. Such restrictions have resulted in first-time homebuyers, and otherwise low-to-moderate income homebuyers, being unable to obtain attractive FHA loans on condominiums. At one time FHA was the “go-to” source for condo financing for first-time buyers; FHA financing offers not only 3.5 percent minimum down payments but is far more lenient on crucial qualifying standards such as credit scores and debt-to-income ratios.
HOTMA provides solutions to the following key problems:
- Ordering the FHA to streamline the entire re-certification process for condo associations and make compliance “substantially less burdensome.”
- Reducing the minimum owner-occupancy ratio from the current 50 percent to 35 percent, unless FHA can provide justification for a higher percentage. The 35 percent ratio will allow “substantial” numbers of developments that fall short of the 50 percent test to get back into the FHA program.
- Expand the eligibility of acceptable ‘owner-occupied’ units to include second homes that are not investor-owned.
- Allowing transfer fees. The legislation directs FHA to stop rejecting condo communities because they collect small transfer fees when units are sold. FHA will now have to follow the lead of Fannie Mae and Freddie Mac, both of whom consider community-benefit transfer fees acceptable.
- Providing more flexibility on the amount of commercial space permitted in condo developments. Some urban condos are designed for mixed-use – residential and commercial combined. Under current rules, some of these developments are ineligible because FHA considers their commercial component excessive. The Act directs FHA to be more flexible and streamlines the process for exemptions to FHA’s rule requiring condominium projects to have no more than 25 percent of the space dedicated to commercial use.
The actual effects of the Act will depend on two things: 1) how quickly FHA puts its revised procedures into the field, and 2) whether thousands of condo associations that have abandoned the program conclude it is time to jump back in. The Department of Housing and Urban Development (HUD) already has rulemaking underway to improve access to FHA-insured condominium loans. Final rulemaking is expected in the near future.
As always, we suggest you contact your local real estate attorney should you have any questions regarding the purchase and/or financing of residential condominium units.
Berlin Patten Ebling, PLLC
Article Authored by Mark Hanewich, Esq. firstname.lastname@example.org
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