Because of the volatility of the condominium market, the Federal Houston Administration (FHA) requires that condominium projects receive approval prior to closing with an FHA mortgage. Many states have hundreds of condominium projects. FHA maintains a database of approved condominium projects to allow lenders the option of providing a “spot approval” when approving an FHA loan in a condominium development that had not received FHA approval. As of Feb. 1, 2010, FHA eliminated the spot loan approval process.
HRAP and DELRAP
FHA provides lenders two options when approving condominiums. The Housing and Urban Development (HUD) Review and Approval Process (HRAP) requires HUD to review all the documents for the condominium project and permanently approve the condominium project. This has always been the process for HUD approval of condominiums. The Direct Endorsement Lender Review and Approval Process (DELRAP) replaced the spot loan approval process for condominiums. The DELRAP approval process is only available to lenders that have unconditional direct endorsement and that have the staff, knowledge and experience to approve condominium projects. Under this program, the lender must make a decision on the project within five business days and upload its findings into FHA’s database.
A condominium is a legal way of owning a property; it is not necessarily a type of building. Some single-family homes are titled with the county as condominiums. The homeowners association owns the land, and the individual owns the home sitting on the land. Being a one-unit home that does not contain multiple units does not necessarily prevent the structure from being considered a condominium. Single-family homes titled as condominiums are called site condominiums. Site condominiums do not require approval under either the HRAP or the DELRAP program. Lenders may approve these without going through the approval process or notifying FHA. This did not change from the spot loan guidelines.
Some types of condominiums are not eligible for approval by FHA. Condominium hotels, often called condotels, are not eligible. Condotels are common in resort areas, and in most cases a party owns the unit but the homeowners association rents out the unit and provides amenities similar to a hotel, including room service and maid service. FHA also forbids timeshares, houseboat projects or any project not used primarily for residential housing. These involve the same qualifications as the spot loan approval process.
Qualifying under the DELRAP program requires the project to include at least two units. No more than 25 percent of the total square footage of the building may be used for commercial space, and no more than 10 percent of the units may be owned by one investor. FHA allows approval of proposed, existing and under-construction condominium projects as long as at least 50 percent of the units have been sold. Additionally, FHA requires that no more than 15 percent of the total unit’s homeowners association dues can be in arrears. Also, 50 percent of the units must be owner-occupied or sold to homeowners who intend to occupy the property. FHA also requires the homeowners association to obtain adequate hazard and flood insurance, if applicable.
David Rouse, currently residing in Raleigh, N.C., has been writing and teaching home owners about the mortgage industry since 1997. Rouse has written training manuals for mortgage professionals and conducted informational first-time home-buyer seminars, providing make-sense answers for a long and confusing process. He studied at Western Kentucky University.