On September 13, 2012, FHA issued Mortgagee Letter 2012-18, putting in place a few temporary condominium project approval guideline changes, effective through August 31, 2014. Among the guidelines affected is the maximum percentage of non-residential space permitted in the project to qualify for FHA financing.
Under the previous guideline, no more than 25 percent of the project's floor area could be used for non-residential or commercial purposes. FHA has now created four classes of mixed-use condominium projects:
- Projects with 25 percent or less of their floor area used for non-residential or commercial purposes complies with the guideline and can be approved under both delegated underwriting and HUD project review at the HOC level
- Projects with more than 25 percent but less than 35 percent of non-residential or commercial floor space are eligible for approval on a case-by-case basis, but only with HUD project review at the HOC level
- Projects with more than 35 percent of non-residential or commercial floor space are eligible for approval on a case-by-case basis, but only with HUD project review by the Philadelphia HOC
- Projects with more than 50 percent of non-residential or commercial floor space are eligible for approval on a case-by-case basis, but only with the specific approval of the FHA Commissioner or her/his designee
FHA still reserves the right to reject any exception request and may require additional information and/or documentation. Even if FHA grants an exception, the project's use still must remain primarily residential, compatible with residential use, and free of adverse effects on the occupants of the individual condominium units. Thus, although it may be difficult to obtain approval on an exception basis, the right kind of mixed-use or transit-oriented condominium project at least has an opportunity to prove that it should qualify for FHA financing.
Since FHA terminated the spot approval process, the entire condominium must apply to HUD and be granted FHA approval before a buyer can purchase a unit with an FHA loan, or before an existing owner can refinance into an FHA loan, including reverse mortgages.
Although there is no assurance that FHA approval of an exception can be obtained, there is now more of a chance to qualify for FHA financing in a truly mixed-use project.