April 30, 1996
MORTGAGEE LETTER 96-23
TO: ALL APPROVED MORTGAGEES
SUBJECT: Single Family Loan Production - Seven-Unit Limitation
The seven-unit limitation prohibits any borrower, including non-
profit organizations, state and local government agencies, and private
investors from obtaining FHA-insured financing for a property that may
be rented if it has or will have a financial interest in more than
seven rental units (regardless of financing type) in a contiguous
area, generally defined as within a two-block radius. This regulation
is designed to limit FHA's insurance exposure on multiple mortgages to
any one borrower in any one area. The seven-unit limitation appears
in our regulations at 24 CFR 203.42(a) and is also stated in paragraph
3-9 of Handbook 4155.1 Rev-4, Change 1 and, specifically for the
Section 203(k) program, in paragraph 4-6 of Handbook 4240.2 Rev-2.
It has come to our attention that there has been some
inconsistency in the application of the seven-unit limitation to non-
profit and governmental mortgagors using Sections 203(b) and 203(k),
as well as private investors using the Section 203(k) mortgage
program, when the stated intent is to resell the mortgaged property to
an owner-occupant. Some lenders and borrowers have interpreted the
seven-unit limitation as not applicable in these circumstance even
though FHA has never adopted that interpretation in any official
issuance. Further, although our credit policies permit certain
categories of institutional and investor borrowers to obtain the same
high percentage of financing as typical owner-occupants, we do not
consider these purchasers as "owner-occupants" for any purpose.
Because of the confusion that apparently exists, we are issuing this
mortgagee letter to clarify the proper interpretation of the seven-
unit limitation.
Discussed below are those circumstances where the seven-unit
limitation either does not apply or may be waived by FHA.
I. Exclusion for Units Under Contract to be Re-sold: When a non-
profit mortgagor or governmental entity under any single family
mortgage insurance program, or a private investor under the
Section 203(k) program, is acquiring properties, we presume such
properties are being purchased for rental purposes even if
homeownership is the eventual goal, and, thus, count those units
toward the seven-unit limitation; this includes mortgages using
the escrow commitment procedures under Section 203(k). However,
to accommodate those mortgagors that will immediately re-sell the
properties to qualified occupant owners, this presumption will
not apply for those units that will be re-sold provided the
mortgagor can provide conclusive evidence that the properties are
under contract to the eventual occupying owner. This, at a
minimum, requires presentation of a bona fide sales agreement and
evidence the eventual owner occupying borrower has been approved
for a new mortgage or assumption of existing mortgage.
For example, a non-profit may be in the process of purchasing and
rehabilitating a dozen housing units in one neighborhood, half of
which will be immediately re-purchased by low- and moderate-
income first-time homebuyers, all of whom have been pre-qualified
by the lender for qualifying assumptions. In this case, those
units for which there are sales agreements that will be
consummated once the rehabilitation work is complete can be
ignored in counting toward the seven unit limitation.
II. Redevelopment Areas and Section 203(k) Mortgage Financing: In
certain areas targeted for redevelopment, 24 CFR 203.42(b)
provides that the seven unit limitation regulation does not apply
on Section 203(k) mortgages if: (1) the neighborhood has been
designated by the state or local government for redevelopment or
revitalization and (2) the government authority has submitted a
plan that clearly defines the revitalization area as well as
describes substantial public and/or private commitments made to
revitalize the area. Therefore, no regulation waiver is needed
in these circumstances to exceed the seven-unit limitation.
The exception for Section 203(k) redevelopment areas is discussed
in more detail in paragraph 4-6 of Handbook 4240.2 Rev-2.
Although no specific regulation waiver is needed, the handbook
provides for direct involvement of the local FHA office before it
will endorse mortgages on more than seven units for a borrower in
the redevelopment area. FHA does not approve redevelopment plans
per se, but it does reserve the right to withhold the exemption
from the seven-unit limitation if the plan does not adequately
describe the specific targeted area or the extent of the public-
private commitment to achieve revitalization. The local FHA
office may also impose a unit limitation based on the past
performance of the borrower. Circumstances that may trigger a
unit limitation would include when the borrower (a) will own more
than 10 percent of the housing units in the designated
redevelopment area or, (b) has more than eight units on adjacent
lots in the designated redevelopment area. The FHA office may
impose whatever unit limitation above seven that it believes is
prudent under the circumstances and will consider the number of
housing units in the targeted area as well as the level of
governmental and private support in making this evaluation.
If a lender anticipates processing Section 203(k) mortgage loans
in a redevelopment area that necessitates an exemption from the
seven-unit limitation, it must submit a copy of the governmental
unit's revitalization plan to the local FHA office and also
identify the purchasing entity. Generally, those borrowers with
proven track records in developing affordable housing will not
have a unit limitation invoked. The local FHA office has 30 days
from the time of receipt to notify the lender that a specific
unit limitation has been adopted for that particular borrower.
For all borrowers, the seven-unit limitation of the regulation
always applies for properties outside a redevelopment area even
if using Section 203(k) mortgage financing, including the escrow
commitment procedure.
III. Projects in Progress Without Seven-Unit Waivers: We recognize
that some lenders and borrowers may have inadvertently
interpreted our regulations as exempting them from the seven-unit
limitation and have begun projects that require seven-unit
waivers. So as not to disrupt any on-going projects and/or cause
undue financial harm, the seven-unit limitation in the
regulations is hereby waived if the borrower can demonstrate that
the project meets the criteria set forth below. This waiver
covers the entire project as presented to the lender when the
initial loan application was made and includes Section 203(b) as
well as Section 203(k) financing. The lender or borrower must
present the following to the FHA office having jurisdiction where
the project is located and must do so within 60 days of the date
of this mortgagee letter in order for the waiver to be
applicable:
Project Description. The project description, as presented
to the lender, must be submitted to FHA. It must identify
the borrower, describe the location of the project and the
number of units involved, as well as the current status,
e.g., number of units already mortgaged, units
rehabilitated, units sold to owner-occupants, etc. It must
also describe whether the project is designed for immediate
re-sales to owner-occupants or as long-term rentals to low-
and moderate-income families and the type of financing,
i.e., Section 203(b) or 203(k).
Contracts for Purchase and Mortgage Approval. In
establishing the on-going nature of the project, the lender
or borrower must provide copies of the sale(s) contracts for
the properties that will constitute the project. The
mortgage lender must also have issued at least one mortgage
approval to the borrower within that project prior to the
date of this mortgagee letter.
Once this submission is made the waiver will be applicable unless
the local FHA office, within 30 days of receiving the documents
and descriptions listed above, notifies the lender or borrower
that the project does not meet the criteria for a waiver. FHA
also reserves the right to withhold a seven-unit waiver if the
local FHA office has previously acted and declared that a unit
limitation was appropriate or has denied a seven-unit waiver for
that specific project.
IV. Specific Seven-Unit Waivers: If a mortgage (whether insured
under Section 203(b) or 203(k)) is subject to the seven-unit
limitation as described by this mortgagee letter, and the
preceding waiver for projects in process does not apply, the
mortgage will not qualify for insurance unless a waiver is
granted by the Federal Housing Commissioner. All waiver requests
must originate with the FHA office having jurisdiction where the
properties are located and must have the recommendation of the
local office when it is forwarded to FHA Headquarters.
In evaluating whether or not good cause exists to grant a
specific waiver to the seven-unit limitation, FHA will consider
whether its exposure to insurance risk is acceptable. This
evaluation may include, but is not limited to, an assessment of
the track record and experience of the borrowing entity, the
anticipated absorption rate of those properties into the rental
or re-sale market, whether the seven-unit waiver will help
contribute to additional affordable housing opportunities in the
area and/or result in substantial rehabilitation of an area.
For non-profit agencies and governmental units, these specific
waivers may include the use of Section 203(b) or Section 203(k)
rehabilitation mortgage insurance. For private investors, the
waiver may only be granted for Section 203(k) mortgages.
V. Condominium Information: As stated earlier, although we permit
certain non-occupying borrowers the same percentage of financing
as available to typical occupant-owners, such mortgages are not
considered as having been made to owner-occupants. This, among
other things, precludes the use of adjustable rate and graduated
mortgages.
Similarly, such mortgages in Section 234 condominium projects do
not count toward the owner-occupancy requirements that must be
met before FHA will insure any mortgages within the project.
Specifically, statute requires that 80 percent of all FHA-insured
mortgages covering units in a condominium project be occupied as
principal or secondary residences, and our regulations further
require that 51 percent of all units in the project, including
those with FHA-insured mortgages, be occupied as principal or
secondary residences. The 80 percent owner-occupancy requirement
may not be waived.
Summary:
All borrowers, regardless of type (non-profit, private
investor, state or local government agency) are subject to
the seven-unit limitation.
Properties that will be immediately re-sold to actual owner-
occupants may be exempted from counting toward the seven-
unit limitation provided sales agreements are executed and
the owner-occupant mortgagors are pre-qualified (see I,
above).
Section 203(k) mortgages in certain redevelopment areas are
exempt from the seven-unit limitation unless the local FHA
office determines that a unit limitation should apply. This
does not require issuance of a specific waiver identifying
the borrower or location of the properties but does permit
the local FHA office to withhold the exemption (see II).
For on-going projects (except those granted exemptions in
redevelopment areas using Section 203(k) mortgage
insurance), an automatic waiver applies provided that the
local office receives the required submission documents
within 60 days of this letter and the project meets the
criteria described previously. The waiver may include
either Section 203(b) or Section 203(k) mortgages (see III).
Those circumstances not qualifying for exemption or
automatic waiver (as described in II and III) must apply to
the local FHA office for a specific seven-unit waiver (see
IV).
Condominium units that are owned by non-profit agencies,
government agencies and private investors, do not count
toward the 80 percent and 51 percent owner-occupancy
requirements (see V).
If you have any questions regarding this issue, please contact
your local FHA office.
Sincerely,
Nicolas P. Retsinas
Assistant Secretary for Housing-
Federal Housing Commissioner
.