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Should All Condominium Associations be FHA Certified?

» Posted September 7, 2017Articles

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA), which is an agency within the U.S. Department of Housing and Urban Development. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan. Because of that mortgage insurance, lenders tend to offer FHA loans at attractive interest rates and more flexible qualification requirements. This may include lower credit scores and smaller down payments.

A borrower may not use an FHA-insured mortgage to purchase a condominium unit unless the condominium association has been certified by FHA and the association is in full compliance with all FHA program requirements at the time of purchase. The certification is good for two years. 

FHA certification is not mandatory for condominium associations. Associations tend to go through the certification process so that there is a larger pool of potential homebuyers, which theoretically increases the value and marketability of units. Further, FHA will only insure mortgages used to purchase a primary residence. As a result, a board can potentially increase the number of owner-occupied homes by certifying the association. In theory, being FHA certified is a signal to all potential buyers that the association is in good financial health, even if the buyer will not be using an FHA-insured loan. 

There is a notion that less qualified buyers may enter the community. FHA publishes materials indicating that their insured loans are rarely subject to default. This may be true, however, there is a reality that FHA-insured mortgage lenders are able to loan to people that don’t necessarily have a great history of paying their debts because of the assurances afforded by the mandatory mortgage insurance. It is truly difficult to know whether the idea of less-qualified buyers coming to the community is well-founded or not. 

The real downside to approval has more to do with the time and expense involved. Most associations, particularly for initial certifications, use a “shepherd” of sorts to go through the process, which may be an attorney or a company that provides these specific services. These services are not free. And, even with professional assistance, the process can be cumbersome, particularly if it is the first time or records from the previous certification process have not been organized in an easily accessible manner.