FHA Condo Rule Assessment
On August 14, 2019, the U.S. Department of Housing and Urban
Development (HUD) released the long-awaited final rule on project
approval for single-family condominiums insured by the Federal Housing
Administration (FHA). For many years, NAR urged HUD to finalize
changes to the previous rule that would ease restrictions on FHA financing
for condominiums, thus enabling more first-time buyers, older adults, and
low to moderate-income families to achieve the dream of homeownership.
Single Unit Approval
Following the aftermath of the Great Recession, HUD suspended the ability of FHA borrowers to
obtain financing for a condominium purchase in a non-FHA approved property, what was often
referred to as “spot loans.” This greatly reduced the available supply of condominiums to FHA
borrowers. Under the new rule, FHA borrowers can obtain Single Unit Approval (SUA) on nonFHA 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. The return of SUA will increase existing supply and offer many
more affordable home ownership opportunities for FHA borrowers.
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 recertification materials. Giving each condominium property an additional 12 months of approval plus
a six-month grace period for submitting re-certification materials will reduce costly and timeconsuming efforts condominium associations face to maintain FHA approval. In addition,
condominium associations will continue to be able to submit an updated re-certification package
rather than the full certification package each time. NAR anticipates many more condominium
properties will apply for FHA eligibility with these changes, greatly improving access to affordable
housing for many households.
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. NAR urged HUD to increase the allowable commercial space in a given property as more
and more buyers are looking to live in areas with a variety of housing, retail and public
transportation options. Increasing the allowed commercial space should also enable more properties
to become FHA-approved, increasing general housing supply in many areas.
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 onerous 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, which allows for much more flexibility in responding to changing market needs.
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.
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