Recently we posted the first of two parts about the changes in qualifications for FHA loans for condominiums. In this part we provide information on the rest of the changes.

 

REDUCTION IN OWNER OCCUPANCY REQUIREMENTS FOR ELIGIBLE PROJECTS

 

FHA’s primary motive for requiring that at least fifty percent (50%) of the units in a project be owner occupied or secondary residences is because it is statistically more likely that condominiums with a high percentage of rentals will have higher foreclosure and assessment delinquency rates than condominiums that are primarily owner occupied. It appears that FHA has settled on a compromise in order to avoid penalizing projects with higher rentals but lower delinquency rates.  FHA currently requires that no more than fifteen percent (15%) of the units can be sixty (60) days or more in arrears in the payment of assessments.  Effective October 15, if only ten percent (10%) or fewer owners are sixty (60) days or more in arrears, FHA will accept owner occupancy rates of only thirty five percent (35%).  This could be a significant boost for Hampton Roads.  We have seen many projects with strong financials rejected for FHA certification simply because of owner occupancy requirements.  Because of the high concentration of the military in our area, many condominium projects can have a higher percentage of rentals but still maintain low delinquency rates.

FHA has also expanded on what qualifies as an owner occupied or secondary residence which we believe will also help increase the rate of owner occupancy in some projects and take the guess work out of defining which units qualify as owner occupied and which do not.  These expanded definitions include {emphasis added}:

  • “any Unit that is occupied by the owner as his or her place of abode for any portion of the calendar year and that is not rented for a majority of the calendar year;
  • any Unit listed for sale, and not listed for rent, that was previously occupied by the owner as his or her place of abode for any portion of the calendar year and that is not rented for a majority of the calendar year; or
  • any Unit sold to an owner who intends to occupy the Unit as his or her place of abode for any portion of the calendar year and has no intent to rent the Unit for a majority of the calendar year.”

 

MIXED USE CONDOMINIUMS

FHA is finally beginning to catch up to the nationwide trend of condominiums in urban areas that contain both residential and commercial/retail space in the same project. The percentage of the total square footage in a condominium that can be comprised of non-residential space is increasing from twenty five percent (25%) to thirty five percent (35%).  Exemptions may also be granted to projects that contain up to forty nine percent (49%) non-residential space if FHA determines that the project has maintained its “residential character.” The determination of “residential character” will be up to the eyes of the beholder (FHA) and will require that additional documentation be submitted.

FHA has also expanded on what qualifies as residential and non-residential space, which has sometimes been a source of confusion for those of us who prepare FHA certification applications.

  1. Commercial, retail and other non-residential space will include:
  • the total square footage of all retail and commercial units (excludes live/work units);
  • parking garage square footage not reserved for the exclusive use of the residential unit owners;
  • building common areas not reserved for the exclusive use of the residential unit owners; and
  • any square footage owned by a private individual or entity.
  1. Residential space will include:

 

  • the total square footage all residential units;
  • parking garage square footage reserved for the exclusive use of the residential units; and
  • building common areas reserved for the exclusive use of the residential units.
  1. Outdoor parking lot square footage will not be considered in the calculation of either the residential or non-residential percentages.
  2. Live/Work condominium projects where the non-residential space and the residential space are both contained within a single unit are considered residential projects and not mixed-use projects.

 

FHA LOANS FOR UNITS IN PROJECTS WITHOUT FHA CERTIFICATION

 Yes, you read that headline right.  FHA will now have a program to allow FHA financing on units located in condominiums that do not have project certification (FHA refers to this as “Single-Unit Approval”).  However, there are significant strings attached:

 

  1. the unit must have a certificate of occupancy that was issued at least one (1) year ago (which will effectively eliminate new construction);
  2. there has to be at least five (5) units in the condominium project;
  3. no more than ten percent (10%) of the units in the project are eligible for Single-Unit Approval (or only one (1) unit in projects with fewer than 10 units);
  4. the unit owners (not the developer) must be in control of the board of directors of the association (which again, effectively eliminates new construction);
  5. at least fifty percent (50%) of the units must be owner occupied (not eligible for reduced thirty five percent (35%) owner occupancy; and
  6. the minimum down payment is ten percent (10%) versus three and a half percent (3½%) down payment for FHA loans in condominiums with project certification.

Because of these restrictions for Single-Unit Approval, this should not be considered a good alternative to obtaining full condominium project approval and recertification every three (3) years.

 

MULTI-UNIT OWNER CONCENTRATION (INVESTOR OWNED UNITS) 

Of course, when it comes to FHA amending its regulations, it’s never all good news. FHA has always had a cap on how many units can be owned by any one individual or entity in a single condominium project (FHA refers to this as “Individual Owner Concentration”) but these requirements have now been tightened as follows:

  1. In condominium projects with twenty (20) or more units, no individual, entity or related party can own more than ten percent (10%) of the total units.
  2. In condominium projects with less than twenty (20) units, no individual, entity or related party can own more than one (1) unit.
  3. A related partyincludes any individual or entity related to the unit owner, including, but not limited to:
  • any individual related to the Unit owner by blood, marriage or operation of law;
  • an individual serving as the Unit owners’ officer, director, or employee; or
  • a Unit owner, direct parent, subsidiary, or any related Entity with which the Unit owner shares a common officer or director.

In the event you have questions about any of these items (imagine that?) please do not hesitate to call us.  Be aware that we have a strong track record of getting certifications through even though at least every other one has some glitch that has to be overcome.  We have done at least 60 certifications or recertifications over the past 10 years.

 

The Community Associations Law Team

Michael A. Inman (Email: mainman@inmanstrickler.com)

Jeanne S. Lauer (Email: jlauer@inmanstrickler.com)

Gregory J. Montero (Email: gmontero@inmanstrickler.com)

Robert V. Timms (Email: rtimms@inmanstrickler.com)

(757) 486-7055

Please visit us at www.vahoalaw.com