November 10, 2016

FHA Condominium Owner-Occupancy Requirement Lowered in Some Situations

Until recently, condominiums that wanted to obtain FHA lending approval were required to be at least 50% owner-occupied.  HUD announced last month that it is willing to issue FHA approvals to condominiums with owner-occupancy percentages as low as 35% in certain circumstances.  This will allow more condominiums to obtain FHA approval for the benefit of their owners.

The following requirements must be met for a condominium project to be approved if it has an owner-occupancy percentage as low as 35%:

1. Existing project;
2. Use HUD Review and Approval Process option;
3. Financial documents must provide for funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 20% of the budget;
4. No more than 10% of the units are delinquent; and
5. Three years of acceptable financial documents.

HUD's letter announcing this change noted 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 .... Owner occupants, unlike either investors or renters, are incentivized to cooperate with other unit owners to ensure successful operation of the project."  However, HUD decided that substantial reserves, a low percentage of delinquent owners, and evidence of long-term financial stability mitigate the risk associated with lower owner occupancy.