A recent inquiry that I received was regarding the impact of Affordable Rental Units on an FHA Condo Approval. The real estate agent that contacted me was troubled because her buyer’s loan was denied by the lender because there are Affordable Rental Units in the condominium project.
Obviously, if the loan got this far, the project must already have been approved with FHA – and it was. The underwriter was denying the loan because he was claiming that the owner-occupancy rate was too low (below 50%). The problem was that he was using the Affordable Rentals in his calculation of this ratio. According to FHA, Affordable Rental Units are exempt from this calculation. In this case, removing these units from the calculation would result in an owner-occupancy ratio of greater than 50%.
I recommended to the real estate agent that the loan officer communicate with the underwriter’s supervisor. All major lenders have in-house condominium specialists who are experts on FHA’s guidelines. If they don’t know the answer to the question, they can contact the jurisdictional Home Ownership Center (HOC) and ask the question.
When Affordable Housing Units or Rentals exist in a condominium project, the project must meet additional criteria:
- The Affordable Units or Rentals must be mandated by a governmental entity – state, county or local ordinance.
- The Affordable Units or Rentals must be specifically named in the legal documents by unit numbers. The documents are not permitted to simply state “10 units”. They must say “Unit X, Unit Y, Unit Z”, etc.
- The Affordable Housing language must meet the criteria set forth in 24CFR203.41. Although it must meet all of the requirements as dictated by this Section, one specific item to pay attention to is that the Affordable Housing restriction automatically terminates if title passes to HUD/FHA.
When a condominium project is approved with FHA, the Affordable Units and Rentals are noted in the system (FHA Connection). If the Affordable Housing language in the condominium’s legal documents are acceptable to FHA and meet 24CFR203.41, those units would be eligible for FHA financing. If they are not acceptable, they will be noted in the system as not being eligible for FHA financing.
This is an example of a “common sense” approach by FHA to carve out the unacceptable Affordable Units and allow for a project approval. Prior to March 2011, if an Affordable Housing clause existed in the project’s legal documents, the entire project was deemed to be ineligible for project approval, and, therefore, FHA financing would be outright disallowed.