FHA Condominium Owner-Occupancy Requirements

As we’ve discussed earlier this year, Congress recently passed the Housing Opportunity Through Modernization Act (HOTMA), which was signed into law by President Obama on July 29, 2016. While the act addresses many aspects of housing and federal housing assistance, of particular interest to us and some of our clients is one part of the act that addresses FHA Mortgage Insurance for Condominiums. The act requires that the Secretary of HUD streamline the project certification requirements that are applicable to insurance for condominium mortgages to that recertification is substantially less burdensome than certifications. In addition, the act requires that the Secretary of HUD also consider and modify other factors and practices in FHA project approvals for condominiums, including the amount of commercial space in a mixed-use project, transfer fees, and owner-occupancy requirements.

Yesterday, HUD issued Mortgagee Letter 2016-15 in which it attempted to address the owner-occupancy requirements of HOTMA. While the act seems to indicate that HUD needed to adjust the owner-occupancy requirement from at least 50% owner-occupied to at least 35% owner-occupied (by saying that if HUD did not issue guidance within 90 days after HOTMA became law, then the owner-occupancy requirements would automatically be reduced to 35%), HUD seems to be pushing back. Nevertheless, in Mortgagee Letter 2016-15, HUD has recognized circumstances in which condominium project approval will be given if owners occupy at least 35% of the units in the project.

In the Mortgagee Letter, HUD states:

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 ownership associations than non-owner occupants. If a unit owner defaults on his or her obligations to the ownership association, the entire project is subject to an increase in risk including, by extension, FHA mortgagors. Owner occupants, unlike either investors or renters, are incentivized to cooperate with other unit owners to ensure successful operation of the project. . . . HUD’s experience shows that higher reserves, a low percentage of association dues in arrears, and evidence of long-term financial stability (as evidenced by financial documents) enable a lower occupancy percentage without unduly increasing risk to the MMIF. Therefore, HUD may approve an occupancy percentage as low as 35 percent if the requirements stated in this Mortgagee Letter are met.

Here are the requirements that must be met for a condominium project to be approved if it has an owner-occupancy percentage as low as 35%:

  1. The project must be an existing project (greater than 12 months old – not new construction or a gut rehab project);
  2. Applications must be submitted for processing and review under the HUD Review and Approval Process (HRAP) option.
  3. Financial documents must provide for funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 20 percent of the budget; and
  4. No more than 10 percent of the total units can be in arrears (more than 60 days past due) on their condominium association fee payments (as defined in Section 2.1.5 of the Guide; and
  5. Three years of acceptable financial documents must be provided.

Whether these changes will make any significant difference in FHA project approvals is yet to be seen, but that’s what we have for now.