Condo projects need to meet minimum owner-occupancy rates before the purchase of an individual unit may be financed with a Federal Housing Administration (FHA)-insured mortgage. As of October 26, 2016, the minimum owner-occupancy rate for condo projects at least 12 months old and meeting certain conditions will be lowered from 50% to 35%. Condo projects still in the construction phase will continue to require a 30% owner-occupancy rate.
The Department of Housing and Urban Development (HUD) acknowledges that FHA-insured mortgages of condo units have a lower default rate than FHA-insured mortgages on SFRs. HUD attributes this success to their strict owner-occupancy requirement, which is why — while lowering the owner-occupancy minimum — HUD is requiring additional default and reserve requirements to show the condo project is stable.
The additional conditions for existing condo projects to qualify for FHA approval with the low 35% owner-occupancy rate are:
- the project needs to submit an application for review under the HUD Review and Approval Process (HRAP) option, usually via the builder, developer, homeowners’ association (HOA), management company, project consultant or an attorney representing one of these entities; [HUD Condominium Project Approval and Processing Guide §1.3]
- the project needs to show funding of replacement reserves for capital expenditures and deferred maintenance in an account which represents 20% or more of the budget;
- no more than 10% of the total units can be more than 60 days delinquent on their HOA dues; and
- the project needs to provide three years of financial documents. [See HUD Mortgagee Letter 2016-15]
Condo projects with an owner-occupancy rate of 50% or higher do not need to take these additional steps. Condo projects need to be re-certified every two years to remain eligible for new FHA-insured financing.
Similar, temporary guidelines were put in place in 2012 and modified in 2015, but this new rule is permanent. The other temporary guidelines, which include a simplified process for the recertification of condominium projects and master insurance provision changes, will expire August 31, 2017 unless action is taken to extend them before this time. [See HUD Mortgage Letter 2016-13]
The new rules supersede the temporary rule extended by Mortgagee Letter 2016-13 which allowed any non-investor-owned unit to count toward the minimum owner-occupancy percentage. Now, only those using or intending to use their unit as a primary or secondary residence (not including vacation homes) are considered owner-occupants.
HUD’s permanent change to the owner-occupancy minimum requirement was ordered by the Housing Opportunity Through Modernization Act of 2016. [See H.R. 3700]
Looser condo guidelines good for growth
In California, condos are the home purchase of choice for homebuyers as varied as first-time homebuyers to retirees.
Condos are less expensive to purchase and their smaller space means they are ideal for homebuyers without children living at home. Further, a buyer choosing between a condo and a single family residence (SFR) will find that for the same amount of money, they will find a condo in a more central, desirable location than any similarly priced SFR. Perhaps most significant, condos tend to appreciate in value more quickly than SFRs — though they also tend to fall more quickly in a declining market.
However, in California’s pricey housing market, condo ownership can be difficult to attain for many first-time homebuyers, who often rely on low down payment FHA-insured mortgages.
This change will potentially ease the burden somewhat for low down payment buyers. But only if eligible condo HOAs seek FHA approval. Buyers have no control over this process, but sellers interested in reaching the largest pool of buyers can approach their HOA board to encourage their condo project to apply. Once the complete application and materials are submitted, it typically takes about 30 days to receive a decision from HUD.
To see if your client’s condo is currently eligible for FHA-insured mortgages, visit HUD’s condo search tool.