HUD tweaks FHA Project Approval Standards – Condominiums with Less Than 50% Owner-Occupancy Can Apply for Exception

As we reported last year, a 2016 law directed HUD to loosen its approval standards so that condominiums with less than a 50% owner-occupancy ratio could potentially qualify for approval.  Under rules issued at the end of 2016, a condominium that has an owner-occupancy ratio below 50% (but no lower than 35%) can apply for a special exception.  Under this exception, additional project approval guidelines will apply, such as a requirement that the project have stable finances for a minimum of three years and lower delinquency rates than the usual requirements.

To summarize some of the basic project approval requirements, some of which were also revised in the recent rulemaking:

• Past Due Assessments – No more than 15% of units can be arrear in their assessments more than 60 days.
• An investor/entity may own up to 50% of the total units (if at least 50% of the total units are owner occupied.  Raises previous limit from 10%.
• No more than 50%** of the units can be investor-owned rentals.  Per the new rule, exceptions can be granted for projects that are 35% owner-occupied, per additional guidelines.
• No more than 50% concentration of FHA loans in the community.
• Reserve funding – at least 10% of budgeted income must go toward reserves, and existing reserves must be adequate to cover capital replacements for next 2 years.
• Leasing Restrictions must comply with the following:
  • No transient leasing of units (defined as less than 30 days)
  • Board of Directors cannot have power to approve/deny leases.
• Usual insurance requirements – master property damage coverage (replacement cost), general liability, directors and officers liability and fidelity bond coverages.

If you have questions regarding the ability of your condominium project to qualify for FHA Project Approval, please contact us.