Thursday, March 23, 2023

Property management firm warns HUD won’t certify certain buildings for FHA loans

By on April 15, 2019

(investmentzen on VisualHunt / CC BY)

Rentals of living units for less than 30 days in a home purchased with an FHA mortgage is not allowed

SAN JUAN – The president of a property management firm is warning on social media that the Federal Housing Administration (FHA) will not certify condominiums under the FHA loan program that have apartments that are rented for less than 30 days.

In its FHA loans rulebook, the Department of Housing and Urban Development (HUD) emphasizes that condo units cannot be used for hotel or transient purposes, said Marco Rosado, president of Icon Management.

These prohibitions have been effect for years, but HUD is now paying particular attention to this because of the proliferation of short-term rental platforms such as Airbnb, Rosado said.

“Recently, HUD sent a denial of its certification request to a condominium-client, which we are processing. In response to this, the condominium must prove to HUD that short-term rentals are not allowed there, and that everything necessary for it to not happen is being done,” said Rosado, who published the letter dated March 19 on his Facebook page.

Rosado stressed that federally guaranteed mortgage loans are generally the most attractive because they are the most flexible in qualifying applicants and because they are the lowest in their initial costs, particularly in relation to early payment and closing costs.

“Among these programs are the two most popular: FHA and Reverse Mortgage, which are administered by HUD,” Rosado said.

HUD is the agency that administers these programs and certifies properties for FHA loans.

“Therefore, if HUD does not certify a condominium for FHA [loans] no one can buy or refinance in that condominium with federally guaranteed loans, including FHA and Reverse,” he said.

To approve a condo, HUD uses a guide called Condominium Project Approval and Processing Guide, which was released as part of Mortgagee Letter 11-22. This 95-page guide includes multiple requirements with which the agency evaluates condominiums in order to certify them every two years. Of the estimated 3,000 condominiums in Puerto Rico, there are only about 120 approved. This is only 4% of the estimated total, “possibly one of the lowest levels of condominiums approved since the FHA loans exist,” he said.

Rosado explained that non-FHA-certified homeowners have more limited refinancing options because the only alternatives to they have are conventional “conforming” and “non-conforming” loans.

“These loans are stricter in terms of applicant qualification, in addition to requiring a higher initial payment, which can be between 10% to 20%, depending on the loan and financial situation and credit of the applicant. In the case of FHA, the down payment could be only 3.5% of the value of the loan,” he said.

On the other hand, the value of the apartments in the condominiums can also be affected by the presence or absence of this FHA certification. This is because not having this certification limits the number of potential buyers.

“Although none of this affects the values of a property at the time of an appraisal, the values are indirectly affected because the units in an FHA-certified condominium will be more attractive to buyers and will qualify a greater number of buyers. These factors undoubtedly affect the number of purchases (and of comparables) in a condominium, which in turn affects the property values of said condominium, due to its attractiveness in the market,” Rosado added.

“FHA loan rules require at least one person obligated on the mortgage to occupy the home as the primary residence, which means you cannot purchase a home and act as a landlord who resides elsewhere,” the FHA says on its website.

“FHA loan rules do allow the owner/occupier to rent out the unused living spaces in the home to others, and in certain circumstances you may even be allowed to use the income potentially generated from such rentals to qualify for the mortgage.

“But there’s one thing you should know about these rules–they apply only to those who are renting for 30 days or more. As in, a typical rental agreement like any apartment or rental home.”

The Airbnb business model is not acceptable under FHA loan rules, which do not mention any specific rental platform.

The FHA added that “the spirit and letter of the rules in this area seek to prevent the use of a home purchased with an FHA loan for ‘transient’ occupancy of 30 days or less,” and “make sure that FHA loans are used for their intended purpose, which is residential. Even though FHA loan rules permit the purchase of mixed-use property, the non-residential nature of the home cannot interfere with the residence,” thus the loans are not available for bed and breakfast operations, condo hotels, vacation homes, timeshares, etc.”

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