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New FHA Condo Rules Expand Access to Reverse Mortgages

In response to changing conditions in the condominium market, the Federal Housing Administration (FHA) today proposed new rules that would allow individual condo units to become eligible for FHA financing, including Home Equity Conversion Mortgages (HECMs), an agency spokesman confirmed to RMD.

FHA is currently seeking public comments on the 43-page proposed rule that seeks to reinstate a process similar to “spot approvals” in unapproved condo developments, as well as create a range of thresholds required for FHA approval, including the minimum owner-occupants in approved condo projects and limits on commercial/non-residential space, the agency stated in a release.

The proposal, which “certainly includes HECMs,” according to the Department of Housing and Urban Development (HUD) spokesman, will differ from the agency’s former “spot approvals” process, though no further details were able to be provided.

Ultimately, FHA will have the ability to specify new owner occupancy, commercial/non-residential, and single-unit thresholds within the proposed ranges through a notice, handbook or mortgagee letter.

“FHA’s intent is to modify its condominium rules to ensure financial soundness and project viability, but in a manner that is more flexible where possible and responsive to the market,” the agency stated in a press release issued Tuesday.

FHA currently requires that approved condos have a minimum of 50% of the units occupied by owners. Through this proposed rule, FHA is specifically inviting comments on this issue and is proposing to establish an allowable range between 25-75%.

“While having too few owner-occupants can detract from the viability of a project, requiring too many can harm its marketability,” FHA stated in the release. “The range allows FHA to choose a specific percentage that is responsive to future market changes.”

The Housing Opportunity through Modernization Act of 2016 (HOTMA) directed HUD, within 90 days of enactment, to issue guidance regarding the percentage of units within an approved condo development that must be owner occupied.

To satisfy the law’s requirement, FHA said it will publish a mortgagee letter in the coming days establishing a new owner-occupancy requirement.

As for single-unit approvals, under certain circumstances, FHA is proposing to insure mortgages for selected condo units in developments that are not currently FHA-approved.

An individual unit may be eligible for single-unit approval if it meets a variety of criteria, including that the condo is not a manufactured home and is located within a project that has at least five dwelling units.

Additionally, a single-unit may be eligible for FHA spot approval if the condominium development is not on the list of FHA-Approved condo projects, or the unit is not in a project that has been subject to “adverse determination for significant issues that affect the viability of the project.”

Under this proposed rule, FHA and participating lenders will not approve projects that are proposed or under construction; however, condo projects may be approved in legal phases or upon completion.

Projects approved under this rule would be those where the work on the project or legal phase, including buildings and infrastructure of the project or legal phase, is fully complete.

The proposal is the latest move by FHA regarding its condo financing policies.

Last fall, the agency published new guidelines intended to increase the number of condo projects that are eligible for FHA insurance, heeding the calls of lawmakers and mortgage industry groups who have long pushed for easier condo requirements.

While those guidelines did apply to all Title II programs, including Home Equity Conversion Mortgages, they did not include single-unit approvals.

View FHA’s proposed rule here.

Written by Jason Oliva