FHA Condo Approvals – Impact of Affordable Rental Units

photo5A 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.

Mixed Use Condominium Exception Requests for FHA Condo Approval

7_25_14Mixed-use condominium projects may be eligible for an FHA condo approval if they meet these two additional basic requirements:

  • The total floor area of the non-residential space is 25% or less (calculations must be provided) and
  • The non-residential aspect of the condominium is homogenous with the residential component.

Exceptions do exist for condominium projects that have more than 25% of their floor area dedicated to non-residential purposes.  Obviously, they would have to meet additional requirements and they may only be processed for approval at the Philadelphia Home Ownership Center.  DELRAP is not an option.

I fielded an inquiry recently regarding a 3-floor condominium where top two floors are residential units and the first floor is commercial space and roughly 33% of the total floor area.  This raised several questions about the exception process.  Here are the answers to those questions:

1. In addition to the standard criteria, what other criteria are examined in order to approve such a project?  I.E., must the project have excessive reserves?

No, but it would be a positive factor if it did, and you would want to point it out.

2. Does the commercial vacancy rate come into play?  If so, is there an allowable percentage of vacancy of the commercial units at the time of approval?

Yes, the vacancy rate is significant, but no minimum acceptable rate has been established.

3. If the elevator only services the residential units, is it acceptable for the legal documents to require that only the residential units be responsible for its maintenance?

Yes.  However, the legal documents must not give preferential treatment to the non-residential units over those that are residential.  This would not be an example of preferential treatment.

4. Is the single-entity ownership percentage allowed to exceed 10% of the units/floor area (up to 50%) or is the project held to the former 10% rule because this approval would be on an exception basis?

One entity may not own more than 50% of the units, including the commercial floor space.

In addition to the above, exception requests must include a statement of ‘good cause’ and must accompany the project-approval package.  For the most part, the request should include the documentation listed on the bottom of page 5 and the top of page 6 of ML 2012-18.

Note that only projects completed for more than one year for which control has been transferred to the unit owners are eligible, and they can only be reviewed under the HRAP process.

Exception requests for FHA condo approval of mixed-use condominium projects are highly subjective.  Homogeneity and the financial picture play a large role in the final determination.

photo credit: Eyesplash – let’s feel the heat via photopin cc

Can A Mixed Use Condominium Get an FHA Condo Approval?

Following my article in the Charlotte Observer last stuartmilesSaturday, a developer contacted me regarding an FHA condominium approval for his mixed use condominium building.  It is a 3-story building with 20 residential units on the top two floors.  The first floor is commercial space.

FHA limits the amount of non-residential space to 25% of the total floor area.  In addition, the non-commercial space must be homogenous with the residential space.  Obviously, a rough estimate of the commercial space in this example is 33%, which exceeds the 25% guideline.

FHA does allow exceptions on a case-by-case basis for condominiums with non-residential space of more than 25% and up to 35%, and maybe even up to 50%.  Such projects must be submitted to the Philadelphia Home Ownership Center regardless of its geographic location in the country.  They may not be processed by a lender through the DELRAP system and have additional requirements to be met.  FHA reserves the right to approve or reject exception requests.

The review process of exception requests is more subjective than for those with non-residential space of 25% or less.  In addition, there are additional required documents that must be supplied including:

  • highrisecondoA cover letter requesting consideration for an exception.  The letter must include good cause reasons for requesting the exception, description of the usage of the floor area in the project by building and floor area and the percentage of non-residential space.
  • An explanation on how the percentage of non-residential space was calculated, providing the calculations.
  • A market analysis which much include a neighborhood analysis.
  • Pictures of the project (both front and back) as well as the surrounding neighborhood – neighbors on all sides, street views and images from across the street.
  • Spreadsheet that provides details about the non-residential units such as the owners’ names, lease terms, lessees’ names, types of businesses, monthly rents and current vacancies.

FHA goes on to say that the non-residential space must not have a negative impact on the residential character in the building(s) in which the residential units are located.  It wants to know that a unit encumbered with FHA financing looks, feels and has the marketability of a residential unit.

FHA also wants to know that the residential units are “in control of their own destiny”.  This basically means that the commercial units do not have an unfair advantage over the residential units in terms of the operation of the association or of the common elements.  An example would be if the commercial units had a lower financial responsibility to the maintenance of the common elements, such as the parking, exterior or roof.

In this particular project, the residential units are responsible for the maintenance of the elevator which services only the top two floors of residential units.  This would not be an example of the commercial units being given lower common charges because the elevator does not service the commercial units.

Basically, so long as the residential units appear to be residential in nature and have proportionate control of the association and the commercial units do not affect the marketability of the residential units and do not have an unfair advantage, the project is more than likely able to obtain an FHA condo approval.  Obviously, this is notwithstanding the remaining criteria for condo project approval.

Info image courtesy of Stuart Miles/freedigitalphotos.net

Condominium photo credit: compujeramey via photopin cc

Congratulations on your new home!


I just wanted to send out a personal “Thank You” for assisting us in getting our new home! It was quite the journey, with a couple of bumps along the way, but we are happy that it is all final and we are now unpacking. We would not have made it without any one of you!

Mickey and Heather Johnson get their home!

Mickey and Heather Johnson get their home!

I wish you all the best!

Mickey and Heather Johnson

Who knows more about credit Women or Men? The Poll says……

Women! Most of the poll questions showed women to be more knowledgeable when it came to credit. One of the keys things I read was that when asked what a good credit score is, 35 percent of women (versus 29 percent of men) knew what a good score was. That is a very low percentage. In today’s world it is extremely important to Know what a good credit score is, how to check your credit, how to improve your credit, and how it effects your everyday life.

For the whole story click here!