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Update to the Owner Occupancy Requirement for FHA Certification and Recertification

Date: November 1, 2016

Update to the Owner Occupancy Requirement for FHA Certification and Recertification

On October 26, 2016, the Federal Housing Administration (“FHA”) issued a new mortgagee letter regarding new owner occupancy requirements for FHA certification and recertification applications.  This mortgagee letter is in response to the Housing Opportunity Through Modernization Act that the President signed the end of July 2016.  A copy of the new mortgagee letter 2016-15 can be found in its entirety here:  Mortgagee Letter 2016-15.  As discussed in more detail below, the mortgagee letter clarifies what is considered an owner-occupied unit and discusses how the standard owner-occupancy requirement of 50% can be lowered to 35% under certain circumstances for existing condominium projects.

Clarification of What “Owner-Occupied Units” Means

The new mortgagee letter took the opportunity to clarify what it means by owner-occupied units that are principal residences versus secondary residences.  Owner-occupied units are considered principal residences where the unit owner maintains or will maintain the unit as his or her permanent place of abode and in which the unit owner typically lives in most of the year.  On the other hand, owner-occupied units that qualify as secondary residences are where the unit owner occupies such residence in addition to residing in his or her principal residence but less than the majority of the year.  A secondary residence does not include a vacation home.

Owner-Occupancy Percentages for “Existing” Condominium Projects

For “existing” condominium projects, FHA keeps the 50% owner-occupancy requirement; however, FHA is willing to lower the owner-occupancy requirement to as low as 35% so long as the condominium project meets certain conditions.  “Existing” condominium projects are ones that have been completed for over a year.

If an existing condominium project is seeking an exception to the 50% owner-occupancy requirement down to at least 35%, the following conditions must be met:

  1. Still seek approval through the HUD Review and Approval Process (HRAP), which means submitting all the required information and documentation already required under the HRAP process;
  2. Provide proof that the condominium project is funding its reserve replacements for capital expenditures and deferred maintenance in an account representing at least 20% of the budget (under the 50% owner-occupancy requirement, 10% of the budget must be dedicated to reserve replacements)
  3. No more than 10% of the total units can be more than 60 days past due (under the 50% owner-occupancy requirement, the delinquency threshold is set at 15%); and
  4. Must provide 3 years of acceptable financial documents, which will include the past 3 years' worth of approved budgets and income and expense statements showing the year-end results, plus the current balance sheet and current income and expense statement for the then-fiscal year.  In addition, the condominium project may be required to turn over certain bank statements and the most recent reserve study.

In addition, the condominium project must show one of the following sets of documents in order to demonstrate the owner-occupancy percentage:

  1. Copies of sales agreement and evidence (loan commitment) that a mortgagee is willing to make the loan; or
  2. Evidence that units have closed and are occupied by the owner; or
  3. Information from the developer/builder that lists all of the units already sold, under contract, or closed that are or will be occupied by the owner (such as a spreadsheet, chart or listing) that is accompanied by a signed certification from the developer.

In regards to what evidence may suffice under b)—which will probably be the most common route existing projects take—it is unclear what documentation may be acceptable.  However, in past experience, such documentation may include rosters maintained by the condominium project of on-site versus off-site unit owner addresses, or spreadsheets showing which units are owner-occupied versus tenant-occupied (with perhaps a certification similar to what is mentioned in c) above).  Condominium projects seeking approval with less than 50% owner-occupancy will have to work with FHA in regards to whatever documentation it ends up wanting.

Owner-Occupancy Percentages Remain the Same for Proposed, Under Construction or Gut-Rehab Conversion Condominium Projects

For condominium projects that are proposed, under construction, less than 12 months old, or a gut rehab conversion, FHA will continue to keep the same requirements as before, which means that phased projects must meet 30% presale and 30% owner-occupancy requirements.

Still Have More Questions or Need Clarification?

Contact Kathleen W. Panagis directly at (703) 280-9268.