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FHA-Insured Financing: Why Most Florida Condos Aren't Eligible

By Christopher Carter - Real Estate Broker Associate

December 7, 2023

The Federal Housing Administration (FHA) is an agency of the US Department of Housing and Urban Development (HUD), a Cabinet-level department of the Federal government. In order to help make mortgage funding available to a broader range of buyers, the FHA insures independent lenders against buyer/borrower default.

The FHA does not make mortgage loans, it insures them. Buyers/borrowers pay mortgage insurance premiums to the FHA and the lender receives an insurance payout from the FHA if the borrower defaults.

Why do some buyers want to use FHA financing? FHA qualifying standards for borrowers are usually more lenient than most lenders’ conventional (not government-insured) loan programs. These standards help buyers with lower credit scores and lower down payments qualify for mortgage financing. Lenders are more willing to make loans using these broader qualifying standards because they are protected against default loss by FHA insurance.

Since the FHA is insuring the lender against borrower default risk, they set underwriting standards for individual loans that are eligible for FHA-insured financing. These include condition, appraised value in relation to loan amount, habitability and resident safety, intended occupancy, and buyers’ financial ability to repay the loan. The buyer, property itself, and purchase transaction details must all meet FHA standards in order to be eligible for FHA-insured financing. This risk management keeps defaults and mortgage insurance payouts as low as possible.

There are many more details involved with FHA financing. Speak with a licensed Mortgage Loan Originator for further information on available financing programs.

When considering a mortgage loan (either conventional or FHA-insured) for an individual condominium residence, all lenders use a Condo Questionnaire to evaluate a Condominium Owners Association’s (COA) financial, legal, and operational condition. Either the Association’s Board of Directors or Management Company completes the Condo Questionnaire. The responses tell lenders’ underwriting departments how well a property meets qualifying standards for a mortgage on an individual condo unit. The Association's rules and finances must meet specific standards along with the buyer/borrower. This is part of all lenders’ risk management for condo mortgages.

With FHA-insured financing, buyer/borrower qualifying tends to be more lenient, while the standards for properties and Associations are usually more strict than most lenders’ conventional (non-FHA) condo standards. Some qualifying standards are shared by both FHA and conventional mortgage programs for Florida condominiums.

In late 2019, the FHA announced that it would start accepting applications for individual condominium unit financing approvals (Single Unit Approvals) in buildings (projects, as they are called) that do not already have overall Condominium Project Approval. Previously, the entire condominium property had to be approved in order for individual condo units in it to be eligible for FHA-insured mortgage financing. Many lenders, real estate agents, and the national media called this a long-awaited breakthrough in condominium financing. That may be true in other parts of the US, though not much changed for Florida FHA condo approvals.

In October 2023, there are almost 25,000 condominium properties (COAs) in Florida according to the Division of Condominiums, Timeshares, and Mobile Homes. However, in the entire State of Florida only around 180 of them are approved for FHA-insured financing.

Less than 1% of all Florida condominium properties are FHA-approved.

As we start getting into why most Florida condo buildings and Associations don’t qualify, it’s important to note that only Primary Residence occupancy is eligible for FHA-insured financing. Second homes and vacation properties are NOT eligible. This by itself eliminates an FHA-insured mortgage as an option for many buyers’ intended use of a Florida condominium!

Florida condos are very different from those in other parts of the US. The main reasons for this are included in the way they were legally established through the Declaration of Condominium (one of the essential Governing Documents or “Condo Docs”) which was drafted during the property’s initial planning stages.

Combined, a COA's Governing Documents include mandatory legal and financial guidelines related to Association governance and operation along with individual unit ownership rights and responsibilities. Buyers of individual residential units automatically become Association members and agree to abide by the rules laid out in the Governing Documents.

It doesn’t matter whether or not buyers intend to follow FHA standards after they own an individual condo unit. If what the Governing Documents either allow or don’t allow isn’t consistent with FHA standards, the entire Condominium Project Approval or Single-Unit Approval will be denied.

All FHA standards have to be met through how current Governing Documents are written and what they allow or don’t allow. Meeting only some of the standards isn't enough.

Here are a few of the requirements that many Florida condominium Associations have difficulty meeting:

Sufficient common element insurance coverage (types, limits, and deductibles – flood if in A or V zone)
Rental policy (30 day minimum - No Short-Term Rentals)
Adequate financial reserves (minimum 10% of annual budgeted income goes to reserve funding - recent Reserve Study preferred)
Transfer fees (fees must be for actual transfer services, not buy-ins or "capital contributions") Reference: 12CFR 1228.

However, the number one standard by far that prevents most Florida condominium Associations from receiving FHA-insured financing approval:

Purchase or leasing restrictions (Board approval of buyers and tenants)

The Governing Docs of most Florida COAs state that the Board or Management Company must approve new buyer/owners and rental tenants. Many Boards require a background or credit check of potential buyers or tenants before approving an application for residency. These practices violate the FHA standard that property “conveyance” (sale or lease) not be subject to consent of a third party. Reference: 24CFR 203.41(a)(3).

HUD looks at third-party approval when selling or renting as opening the door to a potential violation of the Federal Fair Housing Act (a different FHA) which prohibits discrimination based on race or color, religion, sex, national origin, familial status, or disability. Under FHA standards, the property owner must have the right to sell to any buyer and lease to any tenant. A selling or renting owner may request a background or credit check, though the Association and Board (third party) cannot require one under FHA-insured financing standards.

Remember that individual unit owners’ intentions or actions aren’t the issue here. If the Association’s Governing Documents require buyers and tenants to be approved by the Board, that condominium property will not be eligible for FHA-insured mortgage financing.

What if a Florida COA thinks it may want to change its Governing Documents so individual units in it can be eligible for FHA-insured financing? Boards are strongly advised to consult their Association attorneys before even considering amendments to existing Governing Documents, especially if FHA financing eligibility is one of the reasons for doing it.

Condo Boards and Associations should be fully aware that amending their Governing Documents can significantly change the rights of all owners in the condominium property. While FHA-insured financing might make resales in a given Florida condominium building or community available to a wider range of potential buyers, it is important to first understand what existing provisions in the Governing Documents either allow or prevent eligibility.

Changing those provisions can negatively affect Association function and owners' rights much more than any possible benefit that FHA-insured mortgage financing eligibility might provide. Detailed legal and resale market research needs to be performed before making a decision that affects all unit owners.

That's it for this week, a very brief introduction to FHA-insured financing and why it doesn't usually work for Florida condominium properties.

Editor's Note: Christopher Carter is NOT an attorney. He does not give legal advice. For interpretation and application to specific circumstances of anything you read in this article, you must speak with a Florida-Licensed attorney.

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