On August 14, 2019, the U.S. Department of Housing and Urban Development (HUD) released the final rule on project approval for single-family condominiums insured by the Federal Housing Administration (FHA). The final rule goes into effect on Oct. 15.
The finalized changes ease restrictions on FHA financing for condominiums.
Single Unit Approval
HUD suspended the ability of FHA borrowers to obtain financing for a condominium purchase in a non-FHA approved property. This greatly reduced the available supply of condominiums to FHA borrowers. Under the new rule, FHA borrowers can obtain Single Unit Approval (SUA) on non-FHA approved condominium properties that meet the following requirements: at least five units; a limited concentration of FHA-insured units; at least 50 percent owner-occupancy; and a maximum of 35 percent commercial space.
HUD has increased the certification period for FHA condominium properties from two to three years, with an additional six-month grace period after the certification end date to submit re-certification materials. In addition, condominium associations will continue to be able to submit an updated re-certification package rather than the full certification package each time.
HUD has increased the commercial space allowed in an FHA approved condominium property from 25 to 35 percent, and will allow exceptions up to 49 percent. HUD has the discretion to issue mortgagee letters to change the allowable commercial space to be within 25 and 55 percent, if necessary.
The current owner-occupancy requirement is 50 percent. For properties that are over 12 months old with less than 10 percent of their units in arrears, HUD may approve an owner-occupancy level as low as 35 percent. This removes the previous requirement that properties demonstrate reserves at 20 percent or higher to allow for reduced owner-occupancy. Under the final rule, HUD has the ability to establish a different owner-occupancy level by mortgagee letter between 30 and 75 percent.
The current maximum FHA insurance concentration is no more than 50 percent of units. Under the final rule, HUD has the ability to establish a different FHA concentration level by mortgagee letter between 25 and 75 percent, to allow for a quicker response to changes in the real estate market.
Single Investor Ownership
Currently, a single investor in an FHA approved property can own up to 10 percent of individual units in condominium properties with more than 20 units. For properties with less than 20 units, a single investor may own no more than one unit. For single unit approval, a single investor may own no more than 10 percent of the units in properties with 20 or more units, and no more than one unit in a property with less than 20 units.