Our Condominium Has 50% FHA Concentration – Now What?

Oliver26Our first response would be to make sure that you don’t lose your FHA Condominium Project Approval!  Obviously, FHA buyers are attracted to your community so it would be beneficial to the association to maintain this approval (Law of Supply and Demand).

Really, though, the question stems from the FHA guideline that the maximum concentration of FHA loans in a condominium is 50%.  FHA uses case numbers to track all FHA loans and no FHA loan may exist without one.  Once the 50% level is reached, case numbers may no longer be automatically assigned using FHA’s online system FHA Connection.

However, FHA does allow greater than 50% concentration in condominiums that meet its guidelines to be granted an exception.  In these cases, lenders must contact the jurisdictional Homeownership Center (HOC) and request a case number manually.  If the condominium meets the exception criteria, FHA will allow up to 100% FHA loan concentration in the condominium.

All of these criteria must be met in order for FHA to allow the exception:

  • The project must have at least 4 units
  • The project must be 100% complete and has been completed for more than 1 year
  • 100% of the units have transferred from the developer and no one entity owns more than 10% of the units**
  • The project’s budget provides for the funding of a reserve account greater than or equal to 10% of the annual budget
  • Voting control has transferred to the unit owners
  • The owner-occupancy ratio is at least 50%

**Exceptions to the 10% criterion: (1) if the project is 10 units or less, no one person/entity may own more than one unit; (2) Federal, state and qualified non-profit programs may own more than 10% of the units provided that the program is designed to assist low- and moderate- income buyers and renters; and (3) units owned and inhabited by an investor are considered owner-occupied.

The concentration exception terminates with the expiration of the condominium’s FHA project approval.  Once the project is recertified, the concentration exception may be sought again.  Unless HUD changes this with the issuance of another Mortgagee Letter, it can be assumed that exceptions will continue to be granted once the project is approved and continues to meet the above-mentioned criteria.

Top Photo Credit: (c) Can Stock Photo / Oliver26

Our Condominium’s FHA Concentration is 75%, What Do We Do?

kenhurst_300pxThis is a question that arises now and again.  A condominium gets approved with FHA and then a borrower has difficulty obtaining a loan because the FHA concentration is above 50%.

Such is the case with one of the condominiums we helped to get recertified last year.  The loan officer sent an email to the property manager stating that the FHA concentration was 75% and inquired if she knew that.  She then contacted me concerned that this was a problem and asked for an explanation.

Here is my reply:

FHA “concentration” means the percentage of units that are encumbered with FHA financing. According to FHA’s site, 75% of the units in the condominium are financed with FHA loans.   FHA allows up to 50% of the units to be financed with FHA loans but allows exceptions for projects that meet the following criteria:

  • The project has at least four (4) units. YES
  • The project is 100 percent complete and construction has been completed for at least one year, as evidenced by issuance of the final or temporary/conditional certificate of occupancy for last unit conveyed;  YES
  • 100 percent of the units have been sold and no entity owns more than 10 percent of the units in the project;  YES
  • The project’s budget provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; YES
  • Control of the Homeowners Association has transferred to the owners; YES
  • The owner-occupancy ratio is at least 50 percent. YES
  • The exception terminates with the expiration of the current project approval.

According to these criteria, the condominium qualifies for the exception.  As such, FHA will allow up to 100% of the units to be encumbered with FHA financing.

However, standard procedure does not apply once the concentration surpasses the 50% mark.  FHA Case Numbers cannot be assigned using the FHA Connection system.

[A Case Number is the tracking device that HUD uses for all FHA loans and a loan cannot be processed without one.]

The lender must contact the jurisdictional Home Ownership Center (HOC) to be granted the exception and acquire the Case Number.  In this case, the HOC is in Philadelphia; the lender should know who to contact there.

Please let me know if you have any questions about this or if I can help facilitate the loan approval.


Top Photo Credit: (c) Can Stock Photo / kenhurst

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.

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