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FHA Condo Approval Criteria


The following is an overview of the most pertinent conditions FHA requires for condo approvals. Many of these requirements are similar for FNMA and the VA condo approvals. Some of these criteria may vary based on condo type.


Insurance Requirements – Property, liability, D&O, flood (if in flood plain) and crime insurance coverage is required. Property (hazard) insurance must have 100% replacement cost coverage.  Directors and Officers liability coverage (D&O) should be in place. Fidelity Bond/Crime Insurance is required for any project with 20 or more units. The coverage level must be at least equal to the sum of 3 months of HOA dues income plus the aggregate amount in all reserve funds, and ideally the highest deductible amount on other other insurance policies. If the HOA uses a management company, the management company must have comparable levels of coverage and name the HOA as an obligee. Over half of our clients have to increase the amount of their crime policy coverage to become compliant.


Reserves – One of the most closely scrutinized conditions is the level of replacement reserve funding, particularly with older projects.  First, the FHA requires the HOA's budget to have a separate line item for reserve contributions and that level be at least 10% of the gross revenues. A project over a year old should have a balance that reflects an annual 10% contribution---meaning a 5 year old project should have a balance equal to 5 years of contributions plus any other required reserves. The only alternative to this is to provide a reserve study meeting HUD's requirements that supports a lesser reserve amount. Ideally no matter the circumstances the FHA would like some type of analysis, such as a professionally prepared reserve study, that shows the appropriate amount of reserve funding and that the HOA has that amount in reserves. The FHA has been out right rejecting some applications with inadequate reserves, and requiring other HOAs to get a reserve study before reconsidering the application. Submitting a poorly constructed submission package may result in your HOA needing to commission a reserve study, which can cost thousands of dollars and take up to two additional months.


Owner-Occupancy – At least 50% of the units in a project must be owner-occupied (as opposed to rented). One of the documents to be submitted is a list of all rented units and the owners of those units. This criterion has sunk condo projects near colleges that have the majority of units rented to students. 


Investor Ownership – No more than 10 percent of the units may be owned or controlled by one investor (through one or multiple entities).  The unit an owner-occupier lives in is not counted as an investor owned unit. This 10% limit includes all rented and leased units that a developer/builder owns, including those acquired during a project acquisition.  Unoccupied and unsold units owned by a builder/developer are not considered as investor owned and are not part of the 10% limit.  Eligible non-profit and/or eligible government housing programs are not subject to the 10% ownership interest limitation.  Units in rent regulated projects are not subject to the investor cap.  In no event can the investor ownership exceed 49% of the total units at the time of approval.


Non-Residential and Commercial Space – No more than 25% of the total floor area can be used for non-residential or commercial purposes.  Any non-residential or commercial portions must be of a compatible nature with residential use.  Exception requests may be considered on a case by case basis by the HUD regional homeownership center.  Non-residential exceptions will not be allowed above 35% of total floor space.  This includes live / work projects. A project with a live/work unit where the living area is on the 2nd floor and the work area is directly underneath it would not be eligible because this unit would have over 50% non-residential floor space.


Delinquent HOA dues – No more than 15 percent of the total units can be in arrears, defined as 30 days past due, for their condo association fee payments. This amount does not include late payments for prior late fees, pool fees or other administrative expenses.  The 15 percent includes all units, including vacant and bank owned units. Exceptions may be considered on a case by case basis, only under a HRAP submission, up to a 20% cap.


Financial Documents – HOA budgets, last year's and current month's financial statements, bank statements and potentially a reserve study may be required.   Financials must show solvency, specific line items showing at least 10% of monthly dues going into reserves, and adequate funding to cover insurance payments and deductibles.


Special Assessments – FHA considers special assessments to be a potential flag indicating bigger problems and the underfunding of reserves.  A signed and dated thorough explanation of the special assessment is required, and unsatisfactory explanations can result in a reserve study requirement in the best case and an application rejection in the worst case.


Litigation – Any current or pending legislation must be disclosed and the total potential exposure to the HOA must be fully explained.  Routine items such as a mortgagee foreclosure do not have to be reported. The FHA will assess the risk the lawsuit presents to the overall health of the HOA and the marketability of the units, and will reject any sceanrios deemed risky.


Loan Concentration -- The FHA limits its risk in any one project by capping the number of loans it will insure to 50% of all units in the project.  The current “concentration level” can be viewed on the HUD approved condo website at:  https://entp.hud.gov/idapp/html/condlook.cfm.   It is possible to get an exception approved for up to a 100% concentration level for existing projects in good health. ACA can assist you with this request.  Additionally, any FHA-to-FHA streamlined refinance transaction is always allowed.


Sales Restrictions – Any language in the condo legal documents that can be interpreted to either restrict one's ability to sell the unit or to violate the Fair Housing Act will result in a submission rejection. This includes restriction or discriminatory first rights of refusal, or even the restriction on the number of people in a bedroom. ACA's underwriting review will check on this and we will consult with you before submitting anything we believe may be result in a rejection.


Project Certification – Depending on the condo type and submission package, certain “certifications” need to be signed by an authorized representative, under penalty of law, attesting to the condo conditions and submission accuracy.  Unlike several years ago, no attorney certification or letter is required.


Conversions -- Both gut-rehabs and non-gut rehab conversions have special rules and requirements which are too many to list here. However, one of the more restrictive requirements is for an independent reserve study to be performed and any items deemed to require replacement within five years must have the amount of replacement cost contributed into the reserve fund by the developer before any loan can be insured.




Pre-Sale Requirements – For proposed, under development, gut rehab conversion or new projects, a certain threshold of units must be sold before the FHA will insure the first unit.   At least 30% of the total units in the legal phase must be sold (under contract or closed).  This number goes to 50% one year after the first unit is sold for proposed, under construction or existing projects less than a year old.  There are no presale requirements for projects over 1 year old or non-gut rehab projects.


Transfer of Control --  The transfer of control from the Declarant/Developer to the owners must happen no later than the latest of: 1) 120 days after the date 75% of the units have been conveyed; 2) three years after the sale of the first unit; or  3) the time frame established by state or local condominium laws.


10 Year Warranty – For proposed, under construction or gut-rehab conversions that are less than 1 year old, the Developer/Builder must offer a HUD approved 10 year construction warranty plan and have a final inspection performed by an HFA Roster Inspector.  This is not required if the project is in a local jurisdiction that performs a minimum of three inspections (typically footing, framing and final) and issues a final certificate of occupancy. 


Legal Phasing – Legal phases are distinct phases of development as evidenced by the public filings of the condo plats and legal documents.  A 200 unit master development might be legally phased into four 50 unit phases, with each phase proceeding after selling out so many units in the prior phase.  This is in contrast to a “marketing phase” that might promote buildings 1, 2 and 3, out of the 10 buildings defined in the plat and declaration filed at the County Clerk.   Vertical legal phasing is allowed in high rises, with some conditions, in groupings of no less than five consecutive floors. The total number of units declared in a legal phase has bearing on the some of the criteria ratios (pre-sales, owner-occupancy, investor %, etc.)