A. Lenders will have two condominium project approval processing options. The applicable documentation requirements will be the same for each option:

1. HUD Review and Approval Process (HRAP).

2. Direct Endorsement Lender Review and Approval Process (DELRAP), outlined in this Mortgagee Letter. This option is only available to lenders who have unconditional Direct Endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects.

Under DELRAP, lenders must provide the condominium approval or denial documents to FHA within five (5) business days of final disposition. These documents must be uploaded using pdf format through FHA Connection. 2

B. The processing options stated above will be applicable to condominium developments that are:

1. Proposed or Under Construction;

2. Existing Construction; or

3. Conversions.

C. Lenders who are eligible to and do process condominium approvals under DELRAP may exercise the option, at their discretion, to submit a condominium project for approval under the HRAP.  

The Condominium Project has been declared and exists in full compliance with applicable State law requirements of the jurisdiction in which the condominium project is located, and with all other applicable laws and regulations.

A. Condominium Hotel or "Condotels"

B. Timeshares or segmented ownership projects

C. Houseboat projects

E. All projects not deemed to be used primarily as residential

F. Those that do not meet prescribed minimum standards

A. Site Condominiums (effective June 12, 2009)

B. Environmental Review Requirements

If a lender elects to use the HRAP option, then environmental reviews will not be required for projects that, at the time that condominium project approval is requested, have progressed beyond a stage of construction where HUD has any influence over the remaining uncompleted construction. This occurs when:

Environmental reviews will not be required for condominium projects approved using the DELRAP option. If the appraiser identifies an environmental condition or the lender is aware of an existing environmental condition through remarks provided on the Builder’s Certification, Form HUD-92541, the appraisal or other known documentation, the lender must avoid or determine that there are mitigants to address the following conditions before completing its review process:

1. The project is located in a Special Flood Hazard Area designated on a Federal Emergency Management Agency flood map.

2. Potential noise issues, where the property is located within 1000 feet of a highway, freeway, or heavily traveled road, within 3000 feet of a railroad, or within one mile of an airport or five miles of a military airfield.

3. The property has an unobstructed view, or is located within 2000 feet, of any facility handling or storing explosive or fire-prone materials.

4. The property is located within 3000 feet of a dump or landfill, or of a site on an EPA Superfund (NPL) list or equivalent state list, or a Phase I Environmental Site Assessment indicates the presence of a Recognized Environmental Condition or recommends further (Phase II) assessment for the presence of contaminants that could affect the site.

5. The property has any hazards or adverse conditions listed in Section 1.f. of the Builder’s Certification, including, but not limited to, high ground water levels, unstable soils, or earth fill.

6. The project is located in a wetland designated on National Wetlands Inventory maps or designated by State or local authorities.

7. The project is on the National Register of Historic Places or is within a historic district listed on the Register.

8. The appraiser or DE lender is aware of any other condition that could adversely affect the health or safety of the residents of the project.

The following requirements apply to all Condominium Project approvals:

1. Minimum number of units: Projects must consist of two or more units.

3. Right of First Refusal: Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation at 24 CFR part100.

5. Investor Ownership: No more than 10 percent of the units may be owned by one investor. This limitation also applies to developers/builders that subsequently rent vacant and unsold units. For condominium projects with ten or fewer units, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete.

7. Pre-sales: At least 50 percent of the total units must be sold prior to endorsement of a mortgage on any unit. Valid presales include:

1 Secondary residences can only be included if it meets the requirements of 24 CFR 203.18(f)(2). 5

8. Owner-occupancy Ratios: At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units.2 For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies).

2 Units sold to owners who intend to occupy the units must follow the requirements of a valid presale.

For vertical buildings, legal phasing is acceptable if:

a. The floors are legally phased in groupings of no less than five floors;

b. At least a temporary certificate of occupancy has been obtained and all common areas and amenities have been completed; AND

c. A third party completion bond has been obtained.

For purposes of calculating the owner-occupancy percentage and FHA concentration:

a. On multi-phased projects the owner-occupancy percentage is calculated on the first declared phase and cumulatively on subsequent phases if the ownership of the condominium project remains the same.

b. If multi-phasing includes separate ownership per phase, each phase is calculated individually.

c. In single-phase condominium project approval requests, all units are used in the denominator when calculating the 50 percent owner-occupancy percentage.

approved condominium development on the approved condominium listing, which

can be found on both FHA Connection and on the public website at www.hud.gov.

The concentration level will be based on case numbers assigned on units in a

project; FHA will not issue new case numbers once the 30 percent concentration

level (plus a small tolerance to accommodate for some fall-out) has been reached in

any particular development.

a. Projects consisting of three or fewer units will have no more than one unit encumbered with FHA insurance.

b. Projects consisting of four or more units will have no more than 30 percent of the total units encumbered with FHA insurance.

c. Calculation of the level of FHA concentration in a project declared with legal phases will follow the same methodology as owner-occupancy, described above.

11. Budget Review: Mortgagees must review the homeowners’ association budget (the actual budget for established projects or the projected budget for new projects) for all projects. This review must determine that the budget is adequate and:

• Includes allocations/line items 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 (see Section VI, Insurance Requirements).

In cases where the budget documents do not meet these standards, the mortgagee may request a reserve study to assess the financial stability of the project. The reserve study cannot be more than 12 months old. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed.

In lieu of the actual budget documents, mortgagees may request and rely on Fannie Mae form 1073a, Analysis of Annual Income and Expenses – Operating Budget, executed by an authorized representative of the seller/servicer, owners association, or management agent.

A. The condominium project must be covered by hazard, flood, liability and other insurance required by state or local condominium laws or acceptable to FHA as defined below:

• Hazard Insurance: The homeowners association (HOA) is required to maintain adequate "master or blanket" property insurance in an amount equal to 100% of current replacement cost of the condominium exclusive of land, foundation, excavation and other items normally excluded from coverage. If the HOA does not maintain 100% coverage, the unit owner may not obtain "gap" coverage to meet this requirement.

• HO-6 Coverage: In cases where the master policy does not include interior unit coverage, including replacement of interior improvements and betterment coverage to insure improvements that the borrower may have made to the unit, the borrower must obtain a "walls-in" coverage policy (HO-6 policy).

• Liability Insurance: The HOA is required to maintain comprehensive general liability insurance covering all of the common elements, commercial space owned and leased by the owner’s association, and public ways of the condominium project.

• Fidelity Bond/Fidelity Insurance: Fidelity Bond/Fidelity Insurance is required for new and established condominium projects with 20 or more units. The HOA must maintain this insurance for all officers, directors, and employees of the association and all other persons handling or responsible for funds administered by the association. The coverage must be no less than a sum equal to three months aggregate assessments on all units plus reserve funds.

• Flood Insurance: Insurance coverage equal to the replacement cost of the project less land costs or up to the National Flood Insurance Program (NFIP) standard of $250,000 per unit, whichever is less. In the insuring of a residential condominium building in a regular program community, the maximum limit of building coverage is $250,000 times the number of units in the building (not to exceed the building’s replacement cost). The HOA, not the borrower or individual unit owner, is responsible for obtaining and maintaining adequate flood insurance under the NFIP on buildings located in a Special Flood Hazard Area (SFHA). The flood insurance coverage must protect the interest of borrowers who hold title to an individual unit as well as the common areas of the condominium project. If the FHA Roster Appraiser reports that buildings in a condominium project are located in a SFHA the lender is responsible for ensuring that the HOA obtains and maintains adequate flood insurance on buildings located within the SFHA, per Mortgagee Letter 2009-37.

B. Determining Need for Flood Insurance

Mortgagees must determine whether the property improvements (dwelling and related structures/equipment essential to the value of the property and subject to flood damage) are located in a 100-year flood plain. If the property is in a 100-year flood plain, flood insurance is required, per Mortgagee Letter 2009-37. To demonstrate and document that the property is not located in a 100-year flood plain and not subject to flood insurance requirements, the mortgagee must obtain:

• A final Letter of Map Amendment (LOMA) or

• A final Letter of Map Revision (LOMR)

See Loan Approval section for appraisal reporting requirements. 8

Conversion to condominiums occurs in those projects which involve changing the title of an existing structure generally under one title, to property that is separated into units so that the title to most units can be held separately. Changes to condominium conversion requirements are defined below:

1. The one-year waiting period requirement for conversions is eliminated;

2. In the event that FHA is insuring a mortgage on a unit and an undivided interest in the common elements on a project undergoing remodeling or rehabilitation, the entire condominium project, including the common facilities, must be 100 percent completely built before any mortgage may be endorsed. Escrow provisions will be permitted for weather related delays for common areas only.

3. Conversions of properties from non-residential or from rental, whether tenant- occupied or vacant, will be treated as new construction.

This Mortgagee Letter now permits condominium processing consistent with guidance described in Mortgagee Letter 2001-27.

A. In cases where a building permit and a certificate of occupancy (or its equivalent) are issued by a local jurisdiction that performs a minimum of three inspections (typically the footing, framing and final) neither an Early Start Letter nor a HUD approved ten-year warranty plan is required. For those jurisdictions that do not issue a building permit (or its equivalent) prior to construction and a Certificate of Occupancy (or its equivalent) upon completion of construction, a condominium unit that is one year old or less must have either an Early Start Letter (with a minimum of three inspections by an FHA Roster Inspector) or be covered by a HUD-approved ten-year warranty plan (with a final inspection by a FHA Roster Inspector) to be eligible for high-ratio mortgage insurance. Projects are still required to be on the FHA-approved condominium list.

B. FHA will require the completion and retention of the following documents when processing new construction condominium project approvals:

• Builder’s Certification of Plans, Specifications and Site, form HUD-92541

• Builder’s Warranty, form HUD-92544

• Building Permit (or its equivalent)

• Final Certificate of Occupancy (or its equivalent)

C. FHA will accept a temporary/conditional Certificate of Occupancy for new construction and conversions that require substantial rehabilitation under the following circumstances:

• All common areas and amenities for the project must be completed.

• The temporary/conditional Certificate of Occupancy that was issued clearly indicates that the unit is habitable and eligible for immediate occupancy.

• The jurisdiction that is issuing the temporary/conditional Certificates of Occupancy has in place a standard protocol whereby permanent certificates are issued and maintained.

B. Review the project’s financial and legal documents; if acceptable, authorized personnel will sign and date the Lender Certification of Condominium Requirements (Attachment B).

• While FHA expects lenders to submit recorded documents with the condominium project approval package, unrecorded properly executed documents are acceptable in the initial request for project approval.

• Unrecorded documents for conversions will be acceptable if the conversion was a non-occupied rental building (i.e., warehouse or vacant building converted to a condominium regime) that meets all applicable requirements.

• Whenever unrecorded documents are submitted, the lender (for HRAP), DELRAP lender or builder/developer must provide a certification with the final recorded documents and description of any changes from original unrecorded documents.

C. Determine the project’s budget is adequate or meets the alternative standards in Project Approval Section, V, 11.

D. Retain and maintain all documents used to review and approve the project for a period of three years from the date of project approval.

E. If a project is listed as Rejected or Withdrawn on the FHA-approved condominium list, the project will not be eligible for reconsideration unless the request meets the following:

• Project was rejected or withdrawn < 12 months: new/additional information may be submitted to HUD for reconsideration only under HRAP processing based on the rejection or withdrawal date;

• Project was rejected or withdrawn > 12 months: new/additional information may be submitted to HUD for processing under HRAP or may be considered by the lender (and ultimately transmitted to HUD) in the case of projects undergoing DELRAP review.

NOTE: If a project is no longer approved or does not meet approval criteria, then only a FHA-to-FHA streamline refinance without an appraisal is allowed. 10

F. Second and subsequent lenders that submit a unit for insurance in a project that is listed on the FHA-approved condominium list are not required to complete any further approval process. However, as part of loan-level review, FHA will require the lender to certify (Attachment C) it has no knowledge of circumstances or conditions that might have an adverse effect on the project or cause a mortgage secured by a unit in the project to become delinquent. FHA will also require the lender to certify (Attachment C) that it has reviewed and verified the condominium project’s continued compliance with the initial approval requirements regarding investor ownership, percentage of owners in arrears for condominium association fees, owner-occupancy rate and FHA loan concentration rate, and the lender certifies (Attachment C) that the condominium project continues to comply with FHA requirements.

G. Subsequent phases being approved by a different lender must follow the general procedures listed under this Section of the ML. The original lender must also follow these general procedures but will have already satisfied some of the steps listed.

H. All required certifications, as applicable, must be included in the FHA case binder submitted for insurance endorsement.

I. For both new construction and conversions the developer should complete form HUD-92541, Builder’s Certification of Plans, Specification and Site. If the developer/builder intends to market five or more units within the next 12 months with FHA mortgage insurance and block 11"a, b, c, or d" is not checked, the developer/builder is required to complete Form HUD-935.2C, Affirmative Fair Housing Marketing Plan – Condominium or Cooperatives. This completed form must be submitted to the Director of the Processing and Underwriting Division in the jurisdictional HOC for approval (prior to project approval).

K. Transfer of control of the Homeowners Association shall pass to the unit owners within the project no later than the latest of the following:

1. 120 days after the date by which 75 percent of the units have been conveyed to the unit purchasers;

2. Three years after completion of the project evidenced by the first conveyance to a unit purchaser; OR

3. The time frame established under state or local condominium laws if specific provisions regarding transfer of control exist.

11

A. Lender Certification

Lenders must provide certifications on company letterhead signed by a company authorized representative (signature stamps or electronic signatures are not authorized) that:

1. The eligible condominium project complies with applicable FHA requirements addressed within this ML;

2. All condominium legal documents meet HUD regulations, state and local condominium laws; and

3. Pre-sale, owner occupancy and FHA concentration ratios are met.

B. Developer Certification

The developer/builder must provide a certification (Attachment E) on company letterhead signed and dated by an authorized representative of the developer/builder (signature stamps or electronic signatures are not authorized) which states that:

1. The eligible condominium project complies with all applicable FHA requirements addressed in this ML; and

2. All condominium documents meet all HUD requirements, and state and local requirements.

NOTE: FHA will not require an attorney's certification. However, lenders and developers/builders may obtain this as part of their own due diligence process. Lenders as well as developers/builders are reminded that this document will not replace other required condominium certifications they are required to execute (e.g., Applicable Appendices B, C, E and F of this Mortgagee Letter).

Condominium Project approvals will expire two years from the date of placement on the list of approved condominiums. Further participation in the program after this two-year period has expired will require recertification to determine that the project is still in compliance with HUD’s owner-occupancy requirement and that no conditions currently exist which would present an unacceptable risk to FHA. Items that must be given consideration are:

1. Pending special assessments,

2. Pending legal action against the condominium association, or its officers or directors, and

3. Adequate hazard, liability insurance, and when applicable, flood insurance coverage.

12

All applicable, outstanding and any additional FHA mortgage insurance requirements not defined in this ML must be satisfied for individual units.

If unrecorded documents were submitted along with other required documentation for initial project approval, no loan can be insured in the project until the recorded documents are received and the applicable approval data updated.

A. Hazard Insurance

For Home Equity Conversion Mortgages (reverse mortgages), the borrower must obtain and maintain hazard insurance equal to the value of insurable property improvements, per Handbook 4235, REV 1, Chapter 6.

B. Flood Insurance

For both forward and reverse mortgages, lenders must ensure that the Homeowners Association (HOA), not the individual owner, obtains and maintains adequate flood insurance under the National Flood Insurance Program on buildings located within a Special Flood Hazard Area. The insurance coverage must protect the interest of borrowers who hold title to an individual unit as well as the common areas. See Section VI, Insurance Requirements.

If a project has been previously approved, the lender must certify that it has reviewed and verified the condominium project’s continued compliance with the initial approval requirements regarding investor ownership, percentage of owners in arrears for condominium association fees, owner-occupancy rate and FHA loan concentration rate, and the Lender certifies that the condominium project continues to comply with FHA requirements. 13

Project Approval is not required for:

a. FHA-to-FHA streamline refinance transactions or

b. FHA/HUD Real Estate Owned (REO).

Although processed as Section 203(b) loans, the applicable ADP codes for Site Condominiums are 731 (Adjustable Rate Mortgages) and 734.

Appraisal data is collected and reported on Fannie Mae form 1004, in accordance with the Valuation Protocols, Appendix D of HUD Handbook 4150.2.

The Condominium Rider (Attachment D) must be included in the FHA case binder submitted for insurance endorsement.

The appraisal reporting requirements for condominium manufactured homes are:

1. Appraisal must be reported on the Manufactured Home Appraisal Report (Fannie Mae Form 1004C).

2. Subject condominium project must be inspected and the Project Information section of the Individual Condominium Unit Appraisal Report (Fannie Mae Form 1073) must be completed and included as an addendum to the appraisal report.

3. Comparable sales must be condominium manufactured homes. Detailed explanations must be provided when search parameters are expanded due to the lack of comparable sales in subject market area.

The Spot Loan Approval Process as defined in Mortgage Letter 1996-41 is eliminated. The DELRAP and HRAP have been streamlined to allow for uncomplicated condominium project approvals eliminating the need to approve units on a "spot loan" basis. 14

Mortgagees who issue condominium project approvals using the DELRAP process are responsible for material deficiencies associated with the project approval and any loan they originate and/or underwrite using the applicable project approval.

Mortgagees who rely upon a condominium project approval issued by another mortgagee are responsible for the loan level certification (Attachment C). With this certification, the lender is confirming that the company has no knowledge of circumstances or conditions that might have an adverse effect on the project or cause a mortgage secured by a unit in the project to become delinquent. The lender is also certifying that it has reviewed and verified the condominium project’s continued compliance with the initial approval requirements regarding investor ownership, percentage of owners in arrears for condominium association fees, owner-occupancy rate and FHA loan concentration rate, and it certifies that the condominium project continues to comply with FHA requirements.

Monitoring the condominium approval process is critical to the success of the program. Lenders who approve condominium projects utilizing the DELRAP option will be required to submit a copy of the complete condominium project approval package to the applicable Homeownership Center within five (5) business days of approval. Lenders are required to submit the first five DELRAP approvals for review. Further, to manage FHA’s risk, and ensure compliance with all condominium project policy requirements, additional condominium project approvals will be selected for review. The criteria for selection of the additional approvals will be determined and lenders will be notified in future guidance.

Title 18 U.S.C. 1014, provides in part that whoever knowingly and willfully makes or uses a document containing any false, fictitious, or fraudulent statement or entry, in any matter in the jurisdiction of any department or agency of the United States, shall be fined not more than $1,000,000 or imprisoned for not more than 30 years or both. In addition, violation of this or others may result in debarment and civil liability for damages suffered by the Department. 15

FHA will move all currently approved condominium projects to the new approval list and FHA Connection database. The following requirements are applicable based on the date of the initial project approval. Additional guidance on new data entry requirements will be issued in a separate ML.

• Projects that received approval prior to October 1, 2008, will require recertification on or before December 7, 2010.

• Projects that received approval between October 1, 2008 through December 7, 2009, will follow the recertification requirements defined in the Project Approval Section, XIII.

Recertification of approved condominium projects may be processed by HUD using HRAP or by a mortgagee under DELRAP. The DELRAP option is only available to lenders who have unconditional Direct Endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects.

If you have questions regarding this Mortgagee Letter, please call the FHA’s Resource Center at 1-800-CALL-FHA (1-800-225-5342). Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).

Sincerely,

David H. Stevens

Assistant Secretary for Housing-

Federal Housing Commissioner

Attachments 16

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