FHA Condo Approvals – Mortgagee Letter ML 2011-22
Recently, HUD released Mortgagee Letter ML11-22 in which it further clarified and modified the guidelines by which it approves condominium projects. Although condominium projects now have to jump through more hoops in order to get approved with HUD, the clarification of the required documents should make the process easier to go through.
The majority of the changes apply primarily to Pending, Under-construction and recently-converted (less than two years old) Conversion projects, including further defining the difference between a gut-rehab Conversion and a non-gut Conversion.
Phase 1 Environmental Assessment
One of the biggest modifications is HUD now requires all Pending, Under-construction and gut-rehab Conversions to obtain a Phase 1 Environmental Assessment report. HUD didn’t previously require this unless it was known that the site had the potential to be contaminated. Now all new projects are required to obtain a Phase 1.
Budget Line Item 10% Contribution to Reserve Account
Another change deals with the documentation that is required for HUD to review the financial stability of a project. Previously, HUD had not required a line item in the budget which transferred 10% of the annual budget to a reserve account if the reserve account was sufficient. This was left up to the discretion of the project reviewer. Now, the budget must contain this line item or HUD requires the project to complete a Reserve Study by a third party engineering firm in order to determine that the reserve account is sufficient.
Site Condominiums
HUD clarified what a site condo is, what the requirements are for a cooperative to condominium Conversion, for vertical phasing of a project, for Affordable Housing and Deed restrictions. It also determined that an investor who also resides in the project can omit his/her owner-occupied unit from the 10% calculation. This means that technically an investor can own more than 10% of the units provided that he/she lives in one of them. This is especially beneficial for smaller complexes where owner-occupants also own rental units in the project.
True Copies of Recorded Legal Documents
HUD also now requires true copies of all recorded legal documentation, such as the plat maps, building plans, declaration, by-laws and any amendments. Previously, so long as copies were provided, the volumes and page numbers were noted and the documents were signed, this was acceptable. This is of particular importance especially when considering the cost of getting a project approved or recertified. I have seen several projects with more than 10 legal phases, all of which have their own amendments to the original declaration. In these cases, hundreds of pages would need to be obtained from the town hall at a typical cost of $1 per page.
In all, this mortgagee letter is of great benefit to those projects looking to obtain HUD’s approval or to get recertified. Prior to this letter, there were many guidelines that were left to the project reviewer’s discretion. This made processing submissions trickier as some reviewers requested items that were very difficult to obtain and delayed the processing of the files. These clarifications should streamline the process and may even decrease HUD's time to process each submission.
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