New FHA Ruling Means Big Changes for Condo Buyers

For years, the National Association of RealtorsⓇ (NAR) has petitioned the Federal Housing Administration (FHA) to reduce its owner occupancy requirements of 50 percent on condos. That day is finally here.

Why Does Owner Occupancy Matter and How Is It Changing?

Owner occupancy requirements are the standard percentage at which units are sold and condo projects are approved. Historically, in order for a condo project to receive approval it must be guaranteed that 50% of the occupants will be owners living there as either a primary or secondary residence. FHA sees higher occupancy rates as indicative of a successful condo group, while NAR requested they be lowered in order to improve sales opportunities.

In a ruling effective immediately (as of October 26, 2016), the FHA issued a mortgagee letter that stated it was lowering the owner occupancy requirement to 35 percent for existing condos. But they did so with some stipulations.

In addition to existing condo complexes there are a number of other condos such as proposed projects, those under construction, those less than 12 months old, and gut rehab conversions of units. For these, the FHA will allow a minimum owner-occupancy percentage of 30 percent on the declared units.

The head of NAR, John Boughtin, says that while they will continue to support the lower owner occupancy levels for all condos, they believe this change will make a difference and make it easier to qualify for an FHA mortgage to purchase a condo.

This is a big step. Prior to the Housing and Economic Recovery Act (HERA) of 2008, the required owner occupancy percentage was 80 percent. While FHA understands the desire for lower rates, they believe “…owner occupants serve to stabilize the financial viability of the projects and are less likely to default on their obligations to ownership associations than non-owner occupants. If a unit owner defaults on his or her obligations to the ownership association, the entire project is subject to an increase in risk including, by extension, FHA mortgagors. Owner occupants, unlike either investors or renters, are incentivized to cooperate with other unit owners to ensure successful operation of the project…FHA takes seriously its responsibility to take a balanced approach in providing affordable, sustainable housing opportunities while maintaining its fiduciary responsibility to properly manage and mitigate risk to the Mutual Mortgage Insurance Fund (MMIF).”

FHA worries about stability of the homebuyer and defaulting on the loan, while NAR is concerned about the market and selling inventory. We’ll keep an eye on the industry to see if the FHA eventually agrees with NAR. It will probably be a little time before they lower it again. Still, this should jumpstart existing condo complex sales as well as new builds.

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