Change to the FHA “10% to Reserves” Rule?

FHA approval is a status condo associations can attain, allowing unit owners/buyers to receive FHA insurance on their loans which make those loan more attractive to lenders. Depending on your location, as much as 30% – 40% of all residential loans are for people who enjoy FHA insurance. Without your association on the FHA’s “approved” list, you are instantly reducing the buyer pool for units at your association by a significant fraction. If your association is FHA-approved, significantly more buyers can afford to shop for homes in your association because of more favorable loan terms. Current owners benefit by lower time on the market and stronger sales prices. Read more about FHA approval in general here and here.

But the FHA, in order to provide these favorable terms, needs the association to “toe-the line” and meet some minimum standards. For the last few years, these standards have included such things as owner-occupancy ratios (must be at least 50%), and Reserve funding (must be at least 10% of total budgeted income).

On 10/26/16 the FHA came out with a revised set of standards so associations could become approved with owner-occupancy as low as 35%. In their eyes, to accept this higher risk they needed to lower the risk level somewhere else. They chose Reserve funding. So for associations seeking FHA approval with owner-occupancy between 35% and 50%, the FHA will consider them for approval if their Reserve contributions are 20% of total budget. Since adequate Reserve contributions for most associations are 15%-40% of their budget, this indeed stiffens up Reserve funding requirements but doesn’t constitute an insurmountable obstacle.

So when you hear the FHA has doubled its Reserve funding requirement up to 20%, know that this only applies to associations with owner-occupancy between 35% and 50%. The “10% of budget to Reserves” rule still applies to associations with an owner occupancy ratio over 50%.

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