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Bank's 75% owner occupancy guideline

Started by FredB4 • 16 replies • 3747 views

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FredB4 (Ohio)
Posts: 375
Posted:
Banks won't give conventional loans to prospective buyers if less than 75% of a condo assocaition is owner occupied. I have asked several bank loan officers and they all say it is bank policy but non can seem to find it in writing. Has anyone ever seen this policy in writing ?
EllieD (Vermont)
Posts: 446
Posted:
FredB4

As LawrenceC1 just posted the number is 51%.

This is from the HUD/FHA November 2009 Mortgagee Letter 2009-46 B

Also there are new standards effective August 29, 2011, which can be found in the FHA’s Mortgagee Letter 2011-22.

However, not changed is the standard that 51% of the units must be owner-occupied or sold to owners who intend to occupy the units (i.e., not purchased for investment purposes).
TimB4 (Tennessee)
Posts: 21,059
Posted:
Fred,

It's not that they won't give the loans. It's that due to the FHA guidelines in purchasing mortgage notes, and the fact that FHA is one of the key buyers of mortgages, a mortgage that doesn't conform to FHA guidelines might be harder to sell. This means that the bank will be taking a larger risk and therefore might be more selective on what mortgages they make.

The buyer might need to pay more interest, look elsewhere for the loan or look elsewhere to purchase a home.

Tim

FredB4 (Ohio)
Posts: 375
Posted:
I get the 50% guideline from the FHA and Fannie Mae. I think I probably didn't clarify enough.
Under Ohio law the board can limit rentals to meet the requirements of the FHA, Fannie May, VA etc and also "other" institutions that give loans like banks, credit unions etc.
This can be done by the board without owner approval. Not that we wouldn't try bringing it before the association first.
Regular banks won't give conventional loans when the rental ratio is over 25%. The problem is that we can't find anywhere where that 25% is in writing. We have been told that it is bank policy, but the loan officers don't seem to be able to find it written in their guidelines even though it is their policy.
I was wondering if anyone else had come up against this and if they had found the lower bank ratio in writing.
Hope that clears it up a bit more.
Thanks for your input.
Fred
TimB4 (Tennessee)
Posts: 21,059
Posted:
Fred,

Lawrence and Ellie gave you the name of the documents that would indicate the ratio for FHA guidelines. Here is a link to a thread that had links to the document in it.

No bank will release what is or isn't the deciding factor in making a loan. The FHA issues guidelines on what they will require if they were to purchase the note from the bank. Because Franny and Freddie are the main purchaser of the notes, most banks will include those requirements within their own approval criteria. However, those guidelines are not necessarily absolutes for the bank in making their decision.

Unless someone has other information, I believe that what Lawrence and Ellie provided will probably be the only written documentation you will be able to get.

Tim

EllieD (Vermont)
Posts: 446
Posted:
FredB4

I believe that 25% guideline was from a number of years back.

Back then before the mortgagee meltdown we wanted to revise our Declaration to restrict the number of Units that could be rented at any one times – based on our state statute. The Vermont Statue (which is similar to the UCIOA) reads in part:

(c) Unless otherwise permitted by the declaration or this title, an association may adopt rules and regulations that affect the use of or behavior in units that may be used for residential purposes only to:

(3) restrict the leasing of residential units to the extent those rules are reasonably designed to meet underwriting requirements of institutional lenders who regularly lend money secured by first mortgages on units in common interest communities or regularly purchase those mortgages. Otherwise, the association may not regulate any use of or behavior in units.

But we were also not able to find in writing “what the underwriting requirements were, as to the % of Units allowed to be rented”.

That was then, but now we have written guidelines.
FredB4 (Ohio)
Posts: 375
Posted:
unfortunately the 25% rental ratio is alive and well if you want a "conventional" loan from a bank.I have spoken with loan officers from three different banks and they tell me that is the case. They follow the FHA guideline of 50% if a buyer is getting a loan that way through the bank.
As most of you know, FHA loans come with a huge array of restrictions including a lot of restrictions on how an association can control their rental units. Because so few condos were qualifying the FHA recently issued a years waiver allowing restrictions on rentals, but that is due to expire in March 2012. That alone puts most of us off FHA guranteed loans.
Then there is the fact that FHA loans gurantee the mortgage payment but not the HOA dues which are the life blood of the association.
We want to restrict the amount of rentals to 25% so potential buyers will qulafy for conventional type loans, but it is next to impossible to get 75% of owners together much less agree on anything.
Having the banks 25% policy in writing would allow us to restrict rentals without owner approval if we were unable to get it.
Bank loan officers will tell you that the 25% is a bank policy and also tell you that not even the FHA wants to insure loans for non-owner occupied units especially where the association has a large number of rentals.
The problem apparently is that every time the FHA tries to restrict investors they find a loophole to get around it. Don't you just love the government!
We didn't even know about the restrictions on rentals until the waiver poped up. For anyone who hasn't read about the waiver you can see it at the following link:

http://www.cohoalaw.com/from-capitol-hilllegislation-hud-relaxes-leasing-restrictions-for-fha-approval-of-condominium-projects.html
EllieD (Vermont)
Posts: 446
Posted:
FredB4

Why would having the banks 25% policy in writing allow you to restrict rentals without owner approval?

We have also been discussing rental restrictions and would like to restrict to an even lower percentage than 25%, but then allow for a small number of additional hardship rentals. But to do so we would have to amend our Declaration.
FredB4 (Ohio)
Posts: 375
Posted:
Ellie,
That is a very wise move on your part.
I'm not sure about your state, but Ohio State law allows condominium boards to change their declaration or bylaws without owner approval to meet the regulations of institutional mortagees (banks, credit unions etc), FHA, Fannie Mae, Freddie Mac and VA. Of course we would try and do it with owner approval but as I said that would be very difficult.
If we could find a written bank policy mentioning the 25% that they adhere to for their own conventional type loans, we could legally change the rental limit to 25%. Unfortunately,the only written policy we can find is the 50% limit for FHA and Fannie Mae.
PetunkaM (Florida)
Posts: 1,009
Posted:
Unfortunately, these rental/lease restrictions imposed by the lending institutions are going to hurt our economy even more. People will not be able to secure loans and the homes will sit empty and the investors will come in buy these units for cash and at much lower price and it is just an endless circle.
And, amending the declaration to restrict leases or rentals may be just too late or even impossible for many associations in some states.

EllieD (Vermont)
Posts: 446
Posted:
FredB4,

I wonder. Per the HUD/FHA - At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units

50% is the MINIMUM number that must be owner occupied, so a larger number closer to 75% owner occupied is certainly OK.

If 25% max or a lower % is imposed for new rentals, the HUD/FHA criteria would be met.

Then you will probably also want to allow for “grandfathering” and for a certain number of “hardship rentals” above whatever base % you set.

That % (yours) would be necessary to insure meeting the HUD/FHA maximum number of rentals allowed, which is specified in writing.
FredB4 (Ohio)
Posts: 375
Posted:
I agree that all these rental restrictions is eventually going to hurt the association but lenders are scambling to protect themselves from the huge financial mess that they themselves created and right or wrong,they consider rentals a bad risk.
This same mess has put many associations in an impossible situation leaving them unable to qualify for conventional loans and left with FHA guranteed loans that have far more restrictions then most people realize.

Ellie,
Right now you can limit rentals to less than the 50% FHA guideline, but that is only because of the one year waiver that FHA granted. Before March of this year associations who restricted rentals to less than the 50% guideline were disqualified from FHA insured mortgages. This may happen again after the waiver ends in March 2011 unless they extend it.
EllieD (Vermont)
Posts: 446
Posted:
FredB4,

Mortgagee Letter 2011-22 dated June 30, 2011. If I interpret correctly, the FHA made permanent the temporary measures from Mortgagee Letter 2011-03.

Letter 2011-22 consolidated and updated the requirements and procedures for its condominium approval process and replaces existing mortgagee letters (2009-46a, 2009-46b, and 2011-03).

TimB4 (Tennessee)
Posts: 21,059
Posted:
Ellie,

Your correct. Per the letter, here is it's purpose:

This Mortgagee Letter (ML) and the attached Condominium Project Approval and Processing Guide (Guide) consolidate and update the requirements and procedures that constitute the Condominium Approval Process. This ML and the Guide clarify, expand, consolidate and update existing guidance, and replaces MLs 2009-46 a, 2009-46 b and 2011-03.
FredB4 (Ohio)
Posts: 375
Posted:
Thanks for the links and all of your input. I' not really seening anything in the links though that will help me with the traditional bank policy of 75% owner occupancy.This still mostly applies to the FHA and Fannie Mae both of whoam can become a real nightmare.

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