Published in the ECHO Journal, April 2010

In an effort to know fully why the Federal Housing Administration (FHA) has changed their condominium lending requirements, it is important to understand what the FHA is trying to accomplish. Just like Fannie Mae, Freddie Mac or any mortgage lender FHA is required to assess risk in an effort to make lending or underwriting policy. Condominium projects were hit exceptionally hard during this recent real estate collapse. Over the past ten to fifteen years the majority of condominium loans insured by the FHA were done through what was called the “Spot” approval process. The discontinued “Spot” process was very limited as far as project data elements are concerned. FHA’s new project approval guidelines were created in an effort to get baseline data for any condominium project in which they insure loans. This will enable FHA to assess risk and create policy more effectively in the future.

According to FHA Mortgagee Letter 2009-46B, there are clearly two different processes that will determine whether individual loans can be insured in condominium projects. The first process is FHA Condominium Project Approval. No loan will be insured as of February 1, 2010 unless the project is on FHA’s approved list. The second process is the “loan level” review that is required by each lender seeking to insure individual condominium loans with the FHA. This review includes items such as owner occupancy ratios, FHA loan concentration, owner delinquency ratios and multiple unit owners, to name a few. It is possible to approve the project and not be able to insure individual loans. Project approval is mostly a review of legal documentation, the budget and other project related documentation. Due to the variable nature of the loan level data elements, individual loans can be insured one month and may be ineligible for insurance the next.

There are two methods by which a project may be placed on the FHA Approved Condominium List: HUD Review and Approval Process (HRAP) or Direct Endorsement Lender Review and Approval Process (DELRAP). No attorney’s opinion letter is required for legal documentation review especially concerning established condominium projects. Under HRAP, HUD will perform the documentation and budget review process in an effort to determine whether a project will be approved. A lender approving condominium projects under the DELRAP process makes his own determination as to whether or not a project meets FHA’s guidelines. Of particular note here is that any lender making the approval decision on a project is liable for all representations and warranties to HUD and any subsequent lender that relies on the approving lender’s DELRAP decision. Because of this fact very few lenders are submitting under the DELRAP option and Fannie Mae will no longer accept reciprocal project approvals at HUD.

We are intimately involved with condominium financing around the country and quite often we see gross misunderstandings of the FHA 2009-46B guidelines from many entities involved in the transaction. Here are some of the most common misconceptions regarding the new FHA guidelines:

  • Many entities, including attorneys, project approval companies, management firms, lenders or realtors, can submit projects for approval.
  • Our conversations with the FHA indicate that they will not enforce the guideline that the budget should reserve for insurance deductibles.
  • Once a project is approved, the FHA will track FHA loan concentration by project and display the numbers through FHA Connections and the Approved Project List.
  • Reserve Studies or the Fannie Mae Budget Analysis Form 1073 A is required only if the budget does not meet the guidelines for established projects in ML 2009-46B.
  • Project approval is good for two years. The process does not have to be repeated again but FHA will require a recertification process. At this time the recertification has not been clearly defined but references litigation, special assessment and insurance analysis.
  • Sales phasing is not allowed. Projects that are already complete but unsold and were constructed under one phase may be legally rephrased but the documents must be amended to show the new phasing.
  • Foreclosed units are considered bad debt and not delinquencies and should be removed from the delinquency calculation along with non-assessment related delinquencies.

Credit guideline changes like these are common in the lending community. The current FHA and Fannie Mae project guidelines are actually less restrictive than the condominium guidelines that were established in the late 1980s and early 1990s. The new guidelines are much more understandable if you look to FHA and Fannie Mae as agencies that are trying to fulfill their charter to promote prudent home financing and not restrict it.

Greg Pater is the original founder of and current CEO of, an Application Service Provider providing critical association data and documents to the real estate industry nationally. He has more than 20 years experience as a mortgage banker and has managed the funding of over $30 billion of residential mortgage loans during his career.