B. Property Ownership Requirements and Restrictions

Except as otherwise stated in this handbook, FHA's single family programs are limited to owner-occupied principal residences only.

Reference: For more information on what FHA will and will not insure, see HUD 4155.2 1.A.1.b.

A condominium is a multi-unit project that

• has individually-owned units that may be either
• attached in one or more structures, or
• detached from each other, and
• is essentially residential in use (for FHA purposes).

A condominium regime is created by state or local law and is characterized by fee simple ownership of a unit which is defined in the condominium documents, together with common areas. The property interest in these areas is both common and undivided on the part of all unit owners, each of whom belong to the Homeowners' Association (HOA) that typically maintains the property and collects assessments or dues from each unit owner.

Reference: For more information on condominiums, see HUD 4910.1, Minimum Property Standards for Housing.

FHA must approve condominium projects before a mortgage on an individual condominium unit can be insured.

Exception:

In specific circumstances, a loan on a single unit in an unapproved condominium project, known as a "spot" loan, may qualify for mortgage insurance. The lender must certify that the project satisfies the eligibility criteria for a "spot" loan condominium project that has not been approved by FHA.

Reference: For more information on condominiums, including condominium project approval requirements, see

• HUD 4150.2, Valuation Analysis for Single Family One- to Four-Unit Dwellings, and
• HUD 4265.1, Section 234(c), Home Mortgage Insurance for Condominium Units.

Entities purchasing investment properties are limited to a financial interest in seven rental dwelling units.

Reference: For additional information on

• investment property requirements, see HUD 4155.1 4.B.4, and
• the seven unit limitation, see HUD 4155.1 4.B.4.d.

For more information on property eligibility and valuation, see HUD 4155.2 4.

Individual manufactured housing units in condominium projects are eligible for FHA insurance, on both Home Equity Conversion Mortgages (HECM) and forward mortgages. All manufactured housing condominium project (MHCP) approval requests must be processed by the Homeownership Center (HOC) that has authority over the location in which the property is located.

The Spot Loan Approval process as defined in Mortgagee Letter 1996-41 is not applicable to manufactured housing in condominium projects.

MHCPs may not be processed as site condominiums.

References: For more information on

• MHCP approval, see HUD 4150.1, Valuation Analysis for Home Mortgage Insurance, and
• site condominiums, see 4155.1 4.B.1.g.

Site Condominiums are single family detached dwellings encumbered by a declaration of condominium covenants or condominium form of ownership.

Condominium project approval is not required for Site Condominiums; however, the Condominium Rider must be included in the FHA case binder.

Note: Manufactured housing condominium projects may not be processed as site condominiums.

A principal residence is a property that will be occupied by the borrower for the majority of the calendar year.

At least one borrower must occupy the property and sign the security instrument and the mortgage note in order for the property to be considered owner-occupied.

FHA security instruments require a borrower to establish bona fide occupancy in a home as the borrower's principal residence within 60 days of signing the security instrument, with continued occupancy for at least one year.

To prevent circumvention of the restrictions on FHA-insured mortgages to investors, FHA generally will not insure more than one principal residence mortgage for any borrower. FHA will not insure a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance.

Any person individually or jointly owning a home covered by an FHA-insured mortgage in which ownership is maintained may not purchase another principal residence with FHA insurance, except in certain situations as described in HUD 4155.1 4.B.2.d.

Exception: Properties previously acquired as investment properties are not subject to these restrictions.

The table below describes the "exception" situations in which FHA does not object to borrowers obtaining multiple FHA-insured mortgages.

Note: Considerations in determining the eligibility of a borrower for one of the exceptions in the table below include the

• length of time the previous property was owned by the borrower, and
• circumstances that compel the borrower to purchase another residence with an FHA-insured mortgage.

Important: In all cases other than those listed below, the borrower is not eligible to acquire another FHA-insured mortgage until he/she has either

• paid off the FHA-insured mortgage on the previous residence, or
• terminated ownership of that residence.

Important: Under no circumstances may investors use the exceptions described in the table above to circumvent FHA's ban on loans to private investors and acquire rental properties through purportedly purchasing "principal residences."

A secondary residence is a property that a borrower occupies in addition to his/her principal residence.

Secondary residences are only permitted when

• the appropriate HOC agrees that an undue hardship exists, meaning that affordable rental housing that meets the needs of the family is not available for lease in the area or within reasonable commuting distance of work, and
• the maximum loan amount is 85 percent of the lesser of the appraised value or sales price.

Note: DE lenders are not authorized to grant hardship exceptions. Only the HOC may make the determination that an undue hardship exists.

Any request for a hardship exception must be submitted, in writing, by the lender to the appropriate HOC.

Reference: For information on HOC jurisdictions, see HUD 4155.1 8.1.

A borrower may have only one secondary residence at any time.

Secondary residences must meet all of the following requirements:

• the secondary residence must not be a vacation home or be otherwise used primarily for recreational purposes
• the borrower must obtain the secondary residence because of seasonal employment, employment relocation, or other circumstances not related to recreational use of the residence, and
• there must be a demonstrated lack of affordable rental housing meeting the needs of the borrower in the area or within a reasonable commuting distance of the borrower's employment, and the borrower must provide supporting documentation of this, including
• a satisfactory explanation by the borrower of the need for a secondary residence and the lack of available rental housing, and
• written evidence from local real estate professionals who verify a lack of acceptable housing in the area.

An investment property is a property that is not occupied by the borrower as a principal or secondary residence.

With permission from the appropriate HOC, private investors, including nonprofit organizations that do not meet the criteria described in HUD 4155.1 4.A.6.a, may obtain an FHA-insured mortgage when

• purchasing HUD Real Estate Owned (REO) properties, or
• obtaining a streamline refinance without an appraisal.

Note: In HUD REO transactions, owner occupancy is not required when the jurisdictional HOC sells the property and permits the purchaser to obtain FHA-insured financing on the investment property.

Reference: For additional qualifying information on streamline refinances without an appraisal, see HUD 4155.1.3.C.2.

Underwriting considerations on investment properties are listed below.

• Individual investors who credit qualify may assume mortgages made on investment properties. This applies to the transactions described in HUD 4155.1 4.B.4.b, as well as to investment properties purchased before the 1989 ban on investors that have been subsequently streamline refinanced.
• Underwriting considerations regarding such issues as qualifying ratios and the treatment of projected rental income are described in HUD 4155.1.4.E.4.
• Adjustable rate mortgages (ARMs) and graduated payment mortgages (GPMs) are not permitted on investment properties.
• For investment properties, FHA will not insure loans made solely in the name of a business entity (such as a corporation, partnership, or sole proprietorship), except for streamline refinances in which the mortgage was originally insured in the name of a business. Additionally, FHA requires that
• one or more individuals, along with the business entity or trust, must be analyzed for creditworthiness
• the individual(s) and business entity or trust must appear on the mortgage note, and
• if all parties appear on the property deed or title, they must also appear on the security instrument (such as the mortgage, deed of trust, or security deed).
• For purchases of HUD REO properties, owner occupancy is not required when the jurisdictional HOC sells the property and permits the purchaser to obtain FHA-insured financing on the investment property.
• Streamline refinancing without an appraisal is permitted on investment properties.
• Base mortgage calculation is 75% LTV applied to the lesser of the appraised value or the sales price.

Qualified investor entities are limited to a financial interest (that is, any type of ownership, regardless of the type of financing) in seven rental dwelling units, when the subject property is part of, adjacent to, or contiguous to, a property, subdivision or group of properties owned by the investor.

The units that count toward this limitation include

• each dwelling unit in a two, three, and four family property, and
• the rental units in an owner-occupied two, three, or four unit property.

Notes:

• The lender is responsible for ensuring compliance with this regulation.
• Waivers to the seven unit limitation can only be initiated by the jurisdictional HOC for good cause.

Investors must assure FHA that investment properties purchased will not be used for hotel or transient purposes, or otherwise rented for periods of less than 30 days.

Completion of Form HUD 92561 , Hotel and Transient Use Certification, provides this assurance and is required on every application for

• two, three, or four family dwellings, and
• single family dwellings that are one of a group of five or more dwellings held by the same borrower.