05 Nov 2012

CAI’s In Focus Magazine Article – “About FHA Approval” by FHA Review’s Natalie Stewart

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View the full magazine here.

In 2010, the FHA made significant changes to the way they approach insuring mortgages for loans made to purchase Condominiums.  Prior to this date, Condominium Communities were given an “FHA Approval” status that never expired. If a complex was not approved, lenders were able to “Spot Approve” single units within it. FHA financing, and reverse mortgages were available to any unit that was approved using these methods.  In 2010 the FHA created a new, stricter set of guidelines for Condominium Communities that are now in affect.  Once approved, a community will have an expiration date 2 years from the date of approval.  At that point the community must reapply with the FHA.

Major issues affecting approval:

When discussing the FHA Guidelines, Property Managers are typically aware of the major eligibility requirements.  Delinquency rates and owner occupancy limits typically come to mind.  And while those requirements are very important, there are other issues that can be more challenging to overcome.  These are issues within the Governing Documents themselves.

Anyone who has tried to restate and re-record a section of CC&R’s will know how challenging it can be.  The meetings, mailings, voting requirements, and not to mention the attorney’s fees, can be costly and time consuming.  Unfortunately for many communities, their governing documents may preclude them from ever achieving FHA approval, unless properly amended and re-recorded.  Here are examples.

Leasing Restrictions: 

The FHA does NOT allow for the following leasing restrictions within the CC&R’s:

  1. The condominium association may not prohibit leasing all together.
  2. The condominium association may not require that a prospective tenant be approved by the condominium association and/or its agent(s), including but not limited to meeting creditworthy standards.
  3. Leasing restrictions that allow for a rental period of less than 30 days.
  4. Leasing restriction that includes an age restriction.

On first glance, you might think your community is okay.  And even if these restrictions are in the CC&R’s the Board does not enforce them, so it should be fine.  Right?  Wrong!  The FHA will not budge on these.  The only way to remedy this situation would be to amend the CC&R’s and modify the leasing restriction to meet the FHA’s criteria.

Age Restrictions

The FHA will not approve a community with an Age Restriction.  Senior Communities are permitted, however the Declarations must state that the community is intended for age 55 plus.  Simply stating “Adult Community” is not sufficient and prohibiting children or people under a specified age will prevent a community from achieving FHA approval. The FHA believes that these types of restrictions are clear violations of Fair Housing Laws, and they will need to be officially amended and re-recorded.

Live/Work Units and Mixed Use Developments:

The conditions set forth for live/work units and mixed-use properties have prevented many communities from becoming FHA approved.  The main reason has to do with the following requirements:

  • The condominium declaration must state that the non-residential (work) space may not exceed 25% of the unit’s total floor area.
  • The work space may not exceed 25% of the project’s total floor area.

Although many condominiums meet the 25% requirements, it is rare to find this stated in the governing documents.  All live/work or mixed-use developments must have the above verbiage within their CC&R’s or must amend them accordingly.  There are currently rumors of changes regarding these requirements, however we have yet to see them.

Affordable Housing

Condominium Associations with affordable housing units must also meet specific requirements.  Having affordable housing units does not ruin your chances of obtaining FHA Approval, however the following requirements have to be met:

  • The government or eligible nonprofit program restriction meets the exceptions defined in 24 CFR 203.41(c) and (d); or
  • The recorded condominium declarations contain the affordable housing program requirements, including defining the specific units that are covered under the program.

Affordable Housing restrictions are very common, however the specific units are not always called out in the CC&Rs.  Often the CC&Rs read that a certain percentage of the units must be sold as Affordable Housing units.  If the units are not defined within the recorded condominium declarations, an amendment to the legal documents must be prepared and recorded.  Another option is to record an executed (signed and dated) document identifying the affordable units issued by the Affordable Housing Program’s staff.


Communities are often unaware that their CC&Rs contain some of these restrictions.  In many cases the Governing Documents were created over 40 years ago and contain outdated information.  The FHA does not allow for shortcuts.  Board Resolutions, and letters from attorneys are not sufficient.  The Documents must be amended and recorded.

Knowing the FHA Guidelines and how they relate to the Governing Documents of a community is an important aspect of the FHA Approval process.  Many HOA’s, enter into contracts, raise Fidelity Bonds, write off delinquents accounts, and spend Association funds just to find out they will be rejected based on their governing documents. Amending the Governing Documents is a big decision for a community, and the process takes many months and considerable funds.

If you manage any Condominium Associations, it is highly recommended to have your communities Pre-Qualified for FHA Approval.

-Natalie Stewart is the President of FHA Review, which is a division of Association Vendor Solutions.  She has been involved in the HOA industry for over 10 years and can be reached at natalie@fhareview.com.


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