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FHA lowers owner-occupancy requirements for condos

Changes part of Housing Opportunity through Modernization Act of 2016

When President Obama signed the "Housing Opportunity Through Modernization Act of 2016" into law a few months ago, many celebrated because it changed the Federal Housing Administration’s rules for condominium financing, among other changes.

At the time, the National Association of Realtors said that law would “dramatically improve long-fought restrictions on FHA financing for condominiums.”

And Wednesday, the FHA announced that it is indeed changing some of its rules around condo financing, lowering its owner-occupancy requirements on certain condo developments.

Under the FHA’s current rules, approved condominium developments must have a minimum of 50% of the units occupied by owners.

The new rules, which go into effect immediately, would lower this requirement to 35% for existing condo developments provided the project meets “certain conditions,” the FHA said.

“While having too few owner-occupants can detract from the viability of a project, requiring too many can harm its marketability,” the FHA said in a statement. “It is FHA’s position that owner-occupants serve to stabilize the financial viability of the projects and are less likely to default on their obligations to homeowner associations than non-owner occupants.”

According to the FHA, for some condominium projects, the existing owner-occupancy requirement is “necessary” to maintain the stability of FHA’s Mutual Mortgage Insurance Fund.

But the FHA said that it in certain instances, it now believes that it would be possible to protect the MMIF while allowing a lower percentage of owner-occupants. 

“(The Department of Housing and Urban Development’s) experience shows that higher reserves, a low percentage of association dues in arrears, and evidence of long-term financial stability allow for a lower owner-occupancy percentage without undue risk to the MMIF,” the FHA said.

To be eligible for the lower owner-occupancy rules, the condo development must be more than 12 months old. Additionally, the requirements for the lower owner-occupancy rules are:

  • Applications must be submitted for processing and review under the HUD Review and Approval Process (HRAP) option
  • Financial documents must provide for funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 20% of the condo development’s budget
  • No more than 10% of the total units can be in arrears (more than 60 days past due) on their condominium association fee payments
  • Three years of acceptable financial documents must be provided

According to the FHA, for condo projects that are proposed, under construction, which includes existing projects that are less than 12 months old, or “gut rehab” conversions, the FHA will maintain its current owner-occupancy percentage of 30%.

NAR President Tom Salomone welcomed the changes, but said that NAR hopes the FHA will go even further with these new rules.

“NAR has been fighting for changes to FHA’s condominium rules for years, and the mortgagee letter announced will bring some much needed relief to the market,” Salomone said.

“Condominiums will have a much easier time getting certified by FHA, and Realtors will have more options for clients looking to purchase a condo with an FHA mortgage,” Salomone continued. “This is a big win for NAR, and while we believe all condominiums should have the rules applied to them equally, we also believe FHA has heard the concerns of Realtors and is moving in the right direction.”

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