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Looking to buy a property in which you can both live in and operate a business? Your financing options are about to greatly expand if one of HUD/FHA’s proposed Rule changes goes into effect on June 15, 2015 as planned!
At the present time, a prospective borrower may utilize FHA Section 203(b) financing to purchase a mixed-use property if the areas designed for nonresidential purposes do not exceed 25% of the total floor area of the property. Any nonresidential use of the property, however, must be subordinate to its residential use and character. As a result, there are many FHA-financed properties that contain small commercial units such as a beauty salon, dentist office, small store, etc.
However, in HUD’s draft 4000.1 Handbook it is stated that the nonresidential portion of a property can be up to 49% of the total floor area as long as the property is legally permitted and conforms to current zoning requirements.
This is a huge increase in the amount of nonresidential square footage allowed in an FHA-financed property. I am concerned that this Rule change will ultimately result in FHA insuring loans on properties that have too much commercial influence and questionable owner-occupancy status.
Of course, the new Rule states that any “nonresidential use may not impair the residential character or marketability of the property”. This will be a judgment call on behalf of the appraiser & underwriter and, no doubt, there will be inconsistent interpretations of this requirement by lenders, HUD staff, Quality Control reviewers, auditors, and maybe even HUD’s OIG or DOJ Officials in the future.
Some other concerns – will the FHA Roster Appraiser selected for the appraisal assignment be qualified to appraise a property with 49% nonresidential use? Is HUD’s REO Division & contractors prepared to manage and market such properties when they are foreclosed on and come into HUD’s REO inventory?
Maybe HUD will reconsider this new Rule change before the targeted effective date of June 15, 2015. Stay tuned!
