January 19, 2022

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FHA Issues Revised Condo Project Approval Guidelines For Non-Residential Use

The FHA and HUD have issued revised condo project approval guidelines for a number of areas, including the rules governing non-residential use of condo project floor space. According to Mortgagee Letter 2012-18, “This Mortgagee Letter (ML) puts in place temporary condominium project approval guideline changes to some of the current FHA condominium approval policy provisions.”

The letter also says, “These changes replace, for the period specified by this ML, certain approval requirements specifically identified in this ML that were established in ML 11-22 and the attached Condominium Project
Approval and Processing Guide (Guide). It was determined that certain policy adjustments were needed to address current housing market conditions.” (Emphasis ours.)

A section of the mortgagee letter addresses the FHA rule on non-residential use and/or commercial use of condo space in the project. Like other FHA home loans, there’s a general restriction on non-residential use of the property. No more than 25% of the floor space in the home can be used for commercial or non-residential purposes according to the FHA rulebook.

When it comes to condo projects, the FHA is willing to consider exceptions in certain cases, but only as described in the new guidelines below. FHA loan rules say there could be an exception for projects that have greater than 25% non-residential floor space, but less than 35%. According to the mortgagee letter the general rule is as follows:

“No more than 25 percent of the property?s floor area in a project or a unit can be used for non-residential/commercial purposes. The non-residential/commercial portion of the project must be of a nature that is homogenous with residential use, which is free of adverse conditions to the occupants of the individual condominium units. A project can be approved with non-residential/commercial space less than or equal to 25 percent under the HRAP or DELRAP options.”

As for the exception to the 25% rule, FHA now advises;

“Exception Requests: Percentage >25% but ? 35%

Exception requests will only be considered on a case-by-case basis by the jurisdictional HOC. FHA reserves the right to reject any exception request received. Based on the HOC review, additional information and/or documentation may be required. Granting an exception does not change the requirement that the project?s use remains primarily residential, homogenous with residential use and is free of adverse conditions to the occupants of the individual condominium units.”

Do you have questions about FHA home loans? Ask us in the comments section.

Joe Wallace - Staff Writer

By Joe Wallace

September 18, 2012

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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