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New Fannie Mae and Hud Lending rules - Learn how your association is affected

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As condominium owners can attest, the recent economy has not helped the value and marketability of condominiums. Fannie Mae has now implemented new guidelines that can make it yet more difficult to sell condominiums. The Department of Housing and Urban Development ("HUD") has adopted similar new temporary regulations that went into effect on December 7, 2009 and remain effective until December 31. 2010. More restrictive permanent regulations are scheduled to become effective after that time.

The new regulations stand to have an enormous impact on community associations. Historically, Fannie Mae and Freddie Mac own or guaranty over 50% of the America's first mortgages, and HUD insures another substantial portion of FHA loans. If a condominium community fails to adopt the guidelines, then units within that association will not qualify for Fannie Mae underwritten or FHA insured loans. Removing Fannie Mae and FHA financing from the purchasing pool could significantly depress sales within an association.

Fannie Mae. Some of the more significant requirements for a condominium community to obtain Fannie Mae approval include:

  • No more than 15% of the total units in a project may be 30 days or more past due on their association dues.
  • At least 51% of the total units in the project must have been conveyed or be under a bona fide contract for purchase to owner-occupant principal residence or second home purchasers.
  • Lenders must review the homeowners' association projected budget to determine that: (1) it is adequate (i.e., it includes allocations for line items pertinent to the type of condo); (2) it provides for the funding of replacement reserves for capital expenditures and deferred maintenance at least 10% of the budget; (3) and it provides adequate funding for insurance deductible amounts.
  • No single entity — the same individual, investor group, partnership, or corporation other than the developer during the initial marketing period — may own more than 10% of the total units in the project.
  • Insurance must cover 100% of the insurable replacement cost of the project improvements, including the individual units in a condo project.

HUD. Some of the more significant requirements for a condominium community to be eligible for HUD financing include:

  • At least 50% of the units of a project must be owner-occupied or sold to owners who intend to occupy the units; however, vacant or bank-owned properties may be excluded from the calculation of the required owner-occupancy percentage.
  • No more than 10% of the units may be owned by one investor.
  • Projects must be covered by hazard and liability insurance and, when applicable, flood and fidelity insurance.
  • No more than 15% of the total units can be in arrears by more than 30 days in payment of their assessments.
  • No more than 25% of the property's total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogeneous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
  • Budget Review — Lenders must review the Association's annual budget and determine that the budget is adequate, and includes allocations to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and provides adequate funding for insurance coverage and deductibles.
  • In cases where the budget documents do not meet these standards, the Lender may request a reserve study to assess the financial stability of the project. The reserve study cannot be more than 12 months old.
  • Projects of 4 units or more will have no more than 50 percent of total units with mortgages insured by FHA.
  • Project approval must be obtained every 2 years; in addition to other requirements, consideration will be given to: (1) pending special assessments; (2) pending legal action against the association or directors or officers; and (3) adequate insurance requirements being met.

When the HUD guidelines become permanent as of December 31, 2010, the following adjustments will go into effect:

  • Projects of 4 units or more will have no more than 30 percent (as opposed to 50) of total units with mortgages insured by FHA.
  • At least 50% of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. Vacant or bank-owned properties may no longer be excluded from the calculation of the required owner-occupancy percentage.

Projects under developer control and under construction or being converted have different standards from those listed above.
The requirements listed here are not exhaustive, but include provisions most likely to affect an existing condominium community. To increase the value and marketability of units, all community associations should comply with these requirements and make sure that their governing documents address these requirements. Contact our office with any questions about how your association is complying.