As explained in a recent Kaman Report, in July 2016, President Obama signed into law H.R. 3700, the “Housing Opportunity through Modernization Act of 2016.” This law allowed FHA 90 days to issue new regulations pertaining to the owner occupancy requirements when reviewing condominium associations for FHA certification. On October 26, 2016 FHA released Mortgage Letter 2016-15, which amends FHA’s Condominium Project Approval and Processing Guide.
Mortgage Letter 2016-15 clarifies the definition of owner occupancy, which includes principal residences, secondary residences, or units that have been sold to purchasers who intend to occupy them as a primary or secondary residence. A principal residence refers to a dwelling where the owner maintains or will maintain their permanent place of abode, and which the owner typically occupies or will occupy for the majority of the calendar year. A secondary residence refers to a dwelling that an owner occupies in addition to their principal residence, but less than a majority of the calendar year. A secondary residence does not include a vacation home.
In addition, the new Mortgage Letter establishes conditions under which FHA will allow owner occupancy in existing projects as lows as 35%, while retaining a generally applicable 50% owner occupancy requirement. FHA values owner occupancy because owner occupants serve to stabilize the financial viability of the projects and are less likely to default on their obligations to the association. However, FHA will still approve an association between 35% and 50% owner occupancy that:
- Funds replacement reserves for capital expenditures and deferred maintenance in an account representing at least 20% of the budget;
- Have no more than 10% of homes in arrears; and
- Provide three years of acceptable financial documents.
These additional requirements that are required when owner occupancy falls below 50% provides two main benefits for condominium associations. First, now associations with occupancy below 50% that are financially healthy can quality for certification and increase the pool of potential buyers for the homes within the association, therefore increasing the average sale prices due to the increased demand. Second, as the general requirement still remains at 50% owner occupancy, board enacted amendments that limit renting units to 50% of the total units so as to qualify for FHA certification will remain enforceable at 50%.