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How To Get a Condo Development FHA /HUD Approved

June 23, 2012

With less than 25% of Southern California condo associations currently approved for HUD financing (Fannie/FHA/VA); there’s a huge opportunity for knowledgeable agents to create a successful “farming model”. How many expired listings could you “( re-) list” if you could get a condo project it’s HUD approval? If you are selective about which projects you (pre) target you could get this approved in as little as 60 days.
Here is a quick overview of how to get a condo development HUD-approved.
In late 2009, HUD announced a new process for approving condo developments to be eligible for FHA financing.
The most common reasons for condo projects not meeting HUD standards are:

1) Owner Occupancy – Owner occupancy must be greater than 50% at the time of underwriting to be FHA eligible; 70% for Fannie approval.

2) HOA Delinquencies – No more than 15% of the units in a project can be 30 +days delinquent in their HOA dues.

3) Investor ownership – One entity, be it individual, corporation or trust may not own more than 10% of the units within an association. This becomes more of a problem the smaller the number of units in the project is.

4) FHA concentration – No more than 50% of the units within an association may be FHA insured.

5) Litigation – There can be no pending litigation that can adversely affect the common areas (i.e. construction defect). Any litigation will need to be resolved before approval can be granted.

Note: Collection & foreclosure litigation does not make an association ineligible.
6) Reserves – Less than 10% of the budget of the operating budget being set aside for the “replacement reserve fund”.
There are four key points to the new system of approving condos that are important to understand:
First: HUD did away with what were known as “spot” approvals. So it’s an “all or nothing” for project approval.
Second: It’s important to keep in mind that for technical reasons, no application can successfully be submitted without the cooperation of the Board of Directors, as well as any management company that the Board may have retained to help manage the association.
Third: It’s important to know that HUD now has two pathways FHA approval:
1) HUD Review Approval Process (HRAP)
2) Direct Endorsed Lender Review Approval Process (DELRAP). For the purposes of this post, I will skip this method…because it’s only relevant for NEWLY built condo projects.
When Using HRAP:
a) The application is submitted directly to HUD, which will usually take 6-8 weeks to process it.
b) The application itself is free, but most of the time “interested parties” end up incurring fees paid to attorneys, management companies etc., to prepare the application.
Fourth: Approval of a condo development for FHA financing expires every 2 years so the fees spent for the work of a “condo approval service” can be avoided in the future.
·   Standard HUD certification questionnaire (click here for an example). The typical cost     for obtaining this document (via the HOA management company) is $50-$100.
·   This document will be key because it quickly reveals the issues that make or break the cert process.
For example…if the condo project has pending litigation OR has more than 15% home owners delinquent (more than 30 days) on their HOA dues….move on to marketing to another association.
These two issues are certification killers until resolved.
Most recent HOA budget
·     Most recent HOA (and previous year) financial statements
·     Copy of HOA master insurance policy
·     Recorded condo/plat map indicating legal description
·     Recorded condo site plans
·     Recorded condo declarations and any or all annexations and amendments that apply
·     Copy of executed and adopted condo by-laws
·     Articles of Incorporation as filed
·     FEMA Flood Map and Certification Form
·     Outstanding/Pending Litigation Analysis
·     Special Assessments Analysis
·     Last Two HOA Meeting Minutes
·   Fully Executed HOA management agreement, or if self-managed, a letter on HOA        letterhead indicating that fact.
In addition, the application should include the following information:
·     Number of units in development that are currently bank-owned REO
·     HOA tax ID number
·     Month & Year that condo was completed
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