Tag Archives: FHA Approved condos

Why is it that only 9 percent of associations in the country are FHA approved?

I was recently sent this from an owner in an association whose board considered the subject of FHA approval, its pros and cons, and published this to its members as their findings and voted unanimously not to pursue FHA approval. It would be laughable if it weren’t so common.

“FHA Building Approval”

The Board of Directors discussed at length the pro’s and cons of having the Association FHA approved. For the following reasons, it was their unanimous decision not to proceed with obtaining approval and this decision is within the discretion of the Board under the “Business Judgement Rule”:

  • The amount of fidelity Bond coverage will need to be increased by 250% to meet FHA requirements, at an additional unbudgeted cost to the Association.
  • The Capital Reserve Fund will need to be updated annually at a cost that is not in the Operating budget. Therefore, there will need to be a substantial increase in the maintenance fees in order to carry the additional funds that will be required to fund the Reserve Account per the updated study.
  • With FHA mortgages, unit owners may finance up to 97% of the value of their home. Therefore, there is minimal equity in the home and over time, can be over leveraged especially if current market values continue to decrease, as what has already happened with the economy.
  • The Association’s balance sheets and collections will be impaired by permitting purchasers to acquire units with up to 97% financing. More times than not, they will not remit their maintenance fees in a timely fashion.
  • No more than 30% of the units in the community can be subject to FHA mortgages.
  • Therefore, all of the aforementioned conditions would be put in place for the benefit of 54 units at the expense of 180 unit owners, knowing that 126 owners will not benefit from being FHA approved.”

Conclusion number one is accurate, in that the fidelity bond coverage would need to be increased to cover the sum of three months of the standard assessment, plus whatever is held in reserve. Fidelity bond coverage is extremely inexpensive to increase, something this particular board didn’t bother to investigate.

Conclusion number two is completely erroneous. No reserve study is necessary, provided that the association budgets 10% of the standard assessment to reserves.

Conclusion number three defies logic. The statement, “there is minimal equity in the home and over time, can be leveraged especially if current market values continue to decrease”, is nonsensical. The exact OPPOSITE is true, which is to say that the more values drop, the less leverage there is since the equity is declining, not appreciating. No one putting 3.5% down payment is going to be able to refinance any money out of the property in the foreseeable future, given current market conditions.

Conclusion number four not only is ridiculous; the statements contained therein likely violate a number of Federal and State housing discrimination statutes. The judgment that FHA borrowers, more times than not, will not remit their maintenance fee in a timely fashion is arbitrary, capricious, and completely unsupported by the facts, and evidences this boards obvious bias towards government insured borrowers.

Conclusion number five is also incorrect. Fifty percent of the units within an association are eligible for FHA financing, not thirty percent. This is called FHA concentration, and can be as high as 100%, on a case-by-case basis as decided by HUD.

As one can see, boards across the country are breaching their fiduciary duty owed to the association, when considering this most important issue of FHA approval and coming to conclusions that are factually incorrect and discriminatory in nature. I cannot understand how, in this market, an association can eliminate forty percent of the current buyers by voting down FHA approval. Unfortunately, this is a problem that plagues a large percentage of the associations across the country and will not change until these boards educate themselves and gather the facts about FHA approval and its market share.

Why Are There Only 325 FHA Approved Condominium Projects in Florida?

It is an astounding fact that there are only 325 FHA approved condominium projects in Florida, out of an estimated 25,000. As the sunshine state, Florida built condo projects so quickly in the 1990’s and early 2000’s that it became a running joke that the state bird should be changed to the crane.

Certainly the mortgage/real estate meltdown didn’t help matters, but there are problems endemic to Florida that will prevent an increase in FHA market share for the foreseeable future. Unfortunately the general unavailability of FHA condo loans presents yet another obstacle to the recovery of the condominium market in Florida.


Reserves are the primary problem for associations in Florida. The real reason for the problem is that the state’s Condominium Act doesn’t require them. It has been practice, good or bad, to assess members of the association a special assessment to cover the cost of deferred maintenance such as roofing, paint, etc. HUD abhors special assessments, as in their view it is an unfair and arbitrary burden to require members to pay potentially large special assessments with sometimes little or no advance warning. HUD and conventional wisdom dictate that monthly dues increases are the appropriate method for increasing reserve allocations, thereby avoiding the need to levy special assessments. To be eligible for FHA certification, HUD requires that an association allocate at least 10% of standard assessments to reserves. Until condominium associations in Florida begin to proactively allocate to reserves on their own, in the absence of a state requirement, inadequate reserves will be the number one reason for association ineligibility.

Owner Occupancy

Florida’s sunshine, beaches and warm weather are both a blessing and a curse to condominium associations. It’s a blessing to live in such a climate, but a curse in that it produces a large demand for rentals within the state, specifically in the resort areas. For FHA certification, HUD requires that more than 50% of the units within an association be owner occupied. This requirement is obviously problematic for associations where there is a high concentration of rentals, whether short term or long term. Additionally, HOA’s that allow rental periods of less than thirty days are considered condotels, and are therefore ineligible for FHA certification.


Lawsuits have most certainly been a problem in preventing Florida associations from obtaining FHA certification. The rush to build has resulted in many construction defect lawsuits, a big no-no for FHA certification. There is light at the end of the tunnel on this issue as eventually all of this litigation will either go to trial or be resolved in some other way, and will therefore no longer stand in the way of FHA certification.

Associations would be wise to be mindful of HUD requirements and do what they can to meet them. FHA market share is hovering around forty percent currently, with no decrease in the immediate future projected. Eliminating forty percent of the buyers in a marketplace is sure-fire way to hurt values, sales and the market as a whole.