FHA Condo Approvals – Investor Ownership
In processing applications for condominium project approval, HUD looks at a couple of different facets regarding Investor Ownership. HUD’s Mortgagee Letter ML11-22 clarified and modified certain aspects of how it reviews Investor Ownership.
**There is an update to this article that you can find here.**
The first of which is that the concentration of Investor Ownership may not exceed 49% of the total units within a project. HUD desires that the majority be comprised of owners who reside in the units within the project. The actual language is states that the rate of owner-occupancy must be at least 51%. No changes were made here via ML11-22.
The 10% Rule
HUD also places a restriction that no one investor/entity may own more than 10% of the units within a project. In projects with 10 or fewer units, no investor/entity may own more than one (1) unit in the project. This is also not a new guideline; however, in ML11-22, HUD did clarify and modify how this 10% shall be calculated and what are allowable exceptions.
Investor Owner-Occupied Units
One modification that HUD made is to exempt the investor/entity’s owner-occupied unit from the 10% calculation. Therefore, if the investor/entity owns a unit in the project in which he/she resides, this unit is omitted from the 10% calculation. In projects with 10 or fewer units, an investor/entity may own two units, provided that he/she lives in one of them.
Unoccupied/Unsold Units Owned by the Builder/Developer
Unoccupied and unsold units owned by the builder/developer are not considered investor-owned and are therefore exempt from the 10% requirement. This is a major change to the previous guidance provided by HUD which did not allow for this exception. Previously, if the builder/developer was still in the marketing phase and held more than 10% of the units, the project was not eligible for approval with HUD.
This is an important modification because previously, in order for newly constructed projects to be eligible for approval with HUD, the builder/developer would have had to sell enough units such that the builder/developer owned less than 10% of the total number of units.
[Note: if the builder/developer has ownership interest in 10% or more of the units and is actively marketing said units but is renting them – or allowing someone to occupy the units – in the interim, these units are subject to the 10% restriction.]
Non-Profit//Government Housing Programs
Eligible non-profit and governmental housing programs are exempt from the 10% restriction so long as the housing programs are:
- Designed to assist the purchase of low- or moderate-income housing, AND
- Established by Federal law or operated by a State or local government or operated by an eligible non-profit organization as defined by HUD’s current guidelines.
Legally-Mandated Rent Regulations
HUD also clarified that units that are in projects that are subject to legally-mandated rent regulations will be exempt from the 10% requirement.
While there are aspects of ML11-22 that make it more difficult for condominium projects to become HUD-approved, this new guidance regarding Investor Ownership should open the door for more projects to gain HUD’s approval.
The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA. We have assisted nearly 200 condominiums and we can help your association.
ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.
Please contact us with any questions regarding FHA or VA condominium project approvals. You can email me at firstname.lastname@example.org or call me at 404-433-4565. I will be happy to answer any of your questions.
FHA/VA Condo Approval Specialist
404-433-4565 Cell Phone
860-644-3772 Fax Phone
Check out our article in Common Interest magazine on page 19!