FHA Lowers Owner-Occupancy Conditions for Condos

The Federal Housing Administration (FHA) recently lowered the owner-occupancy threshold required for condominiums to become eligible for FHA financing.

FHA currently requires that approved condo developments have a minimum of 50% of the units occupied by owners, however, the agency determined last week via Mortgagee Letter 2016-15 that this requirement can be lowered to 35% for existing condos, provided the project meets certain conditions.

“For some condominium projects, the existing owner-occupancy requirement is necessary to maintain the stability of FHA’s Mutual Mortgage Insurance Fund (MMIF),” FHA stated in a press release. “In certain instances, however, FHA believes that it would be possible to protect the Fund while allowing a lower percentage of owner-occupants.

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FHA pointed to HUD’s experience, which shows that higher reserves, a low percentage of association dues in arrears, and evidence of long-term stability allow for a lower owner-occupancy percentage without placing “undue risk” to the MMIF.

For condos greater than 12 months old, FHA will lower the owner-occupancy requirement to as low as 35% under certain conditions.

One of those conditions requires applications that must be submitted for processing and review under the HUD Review and Approval Process option.

Additionally, no more than 10% of the total units within the condo development can be in arrears—which FHA defines as more than 60 days past due—on their condo association fee payments.

Condos will also be subject to provide three years worth of “acceptable” financial documents. These documents must provide for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 20% of the condo development’s budget.

Meanwhile, for condo projects that are proposed, under construction (including existing projects less than 12 months old) or gut rehab conversions, FHA will maintain its current owner-occupancy percentage of 30%.

The updated owner-occupancy requirements arrive in the midst of an ongoing public comment period on a set of proposed rules that would, among other modifications, allow individual condo units to become eligible for FHA financing, including reverse mortgages.

Effective immediately, Mortgagee Letter 2016-15 can be viewed here.

Written by Jason Oliva