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New FHA Regulations Effect Condominium Unit Sales and Financing


Like all housing, the sales of condominiums have been significantly impacted by the state of the housing market. Also effecting sales are new rules and regulations applicable to government backed loans, as well as those adopted by conventional lenders. In particular, new requirements for FHA financing directly concern condominium sales. As of February 1, 2010, the FHA now requires that an entire condominium project be FHA approved, discontinuing the prior “spot approval” for the sale individual units. Significantly, these regulations preclude FHA financing where 15% or more of the units are delinquent in paying fees and assessments. Additionally, only 50% of the units in a project may receive FHA financing, and that ratio will be reduced to 30% after 2010.

HUD Section 234(c) of the National Housing Act provides for government insurance to lenders against losses on mortgage loans for purchase or refinance of condominium units. Condominium projects often had FHA approval at the time they were constructed and units were first offered for sale by the developer. If not, there was previously a “spot approval” process for the financing of sales of individual condominium units. As of February, however, the entire condominium must be an FHA approved project. Unless a project is already on the approved list, the condominium must apply for approval in order for FHA financing to be offered in connection with unit sales.

In order to apply, existing condominium must meet certain eligibility guidelines:

  –  The Council of Unit Owners must have a completed the HUD questionnaire.

   – The condominium must be completed, with no on-going or anticipated addition of common elements, units or other facilities.

   – At least 50% of the units must be owner occupied.

   – No more than 15% of the units may be delinquent for more than thirty days with respect to the payment of fees and assessments.

   – FHA insurance will be available to only 50% of loans in any Condominium until December 31, 2010, after which this limit will decrease to 30%.

   – The Council of Unit Owners’ insurance premiums and deductibles must be included as part of the annual operating budget.

   – The condominium must secure fidelity coverage in an amount equal to three months aggregate assessments plus reserve funds.

  –  The condominium’s insurance policy must cover 100% of the replacement cost exclusive of the land.There may not be any litigation, other than that related to assessment collection. However, the FHA will, on a case by case basis, consider requests for exemptions for pending litigation.


   – The condominium must not be a party to litigation, except for that related to the collection of delinquent assessments.  However, a request for an exemption for pending litigation will be considered on a case by case basis.

   – The condominium may not permit daily rentals.

Once approval is obtained, it is good for two years. Any community that is unsure as to whether it is on the approved list, or wishes to obtain information on applying for approval, should contact the local HUD office. Condominiums in Maryland can contact the Baltimore field office at The City Crescent Building, 10 South Howard Street, Fifth Floor, Baltimore, Maryland 21201, 410-962-2520. Condominiums in Montgomery and Prince George’s Counties can also contact the Washington field office at 820 First Street, NE, Suite 300, Washington, D.C. 20002, 202-275-9200.

A final note on pending litigation: The involvement of a condominium in litigation, except that relating to the collection of delinquent assessments, is always an issue in connection with financing for sales or refinancing of units. This is true for conventional loans, as well as government backed financing. However, commercial lenders and HUD will make exceptions, provided that they are given with sufficient information on the nature of the law suit, and its anticipated duration and outcome.