Luna Harper
If you're renting a townhome, it's important to understand your rights and the regulations that apply to your residence. In the United States, the Department of Housing and Urban Development (HUD) has established specific guidelines for housing through the Federal Housing Administration (FHA). While the FHA provides insurance on mortgage loans, there are certain requirements for properties to be FHA-compliant. For instance, FHA loans are typically intended for buyers who plan to use the property as their primary residence, and they cannot be used for financing a rental home. However, there are exceptions, such as when an owner occupies one unit of a multifamily property and rents out the other units. In terms of townhomes, FHA compliance depends on factors such as the number of units, elevator access, and whether the townhomes are standalone or connected to other buildings.
| Characteristics | Values |
|---|---|
| FHA-covered dwelling units | Multistory townhouses with elevators provided internal to the unit |
| Multistory townhouses connected to an elevator-served building or structure | |
| Townhouses with no more than four units | |
| Townhouses with a usable kitchen and an accessible bathroom | |
| FHA-ineligible properties | Fraternity/sorority houses |
| Properties rented out as Airbnb spaces | |
| Properties rented out within 30 days | |
| Owner-occupied buildings with four or fewer units | |
| Single-family homes rented without a broker | |
| Religious organizations | |
| Senior housing | |
| FHA requirements | Low down payment |
| Occupancy within 60 days | |
| Primary residence for at least one year | |
| Good credit score |
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What You'll Learn
FHA loans for townhouses
The Federal Housing Administration (FHA) offers loans for a variety of property types, including townhouses. FHA loans are a good option for homebuyers who have not saved much for their down payments, as they allow for a low 3.5% down payment.
FHA rules for home loans generally allow for a single unit or as many as four living units. Townhouses typically have two living units, and two-unit townhomes typically fall into the FHA requirements for a home loan. For example, when applying for an FHA 203(k) rehab loan, there are specific requirements for approved improvements on the property where townhomes and townhome-style condo units are being financed or refinanced. After rehabilitation is complete, the unit must be located in a structure containing no more than four units, with each townhouse considered as one structure, provided each unit is separated by a one-and-a-half-hour firewall from foundation to roof.
However, it is important to note that even when the property type is acceptable, there may be factors that could complicate the loan. For instance, using an FHA loan to buy a townhome with the intention of renting out one of the units as an Airbnb space is not allowed. Short-term rentals of 30 days or fewer are prohibited for properties purchased with an FHA loan. Additionally, all properties purchased with an FHA mortgage must be the owner's primary residence within 60 days of closing, and occupancy is a condition of loan approval.
In some states, such as Washington, the condo or townhouse must be approved for an FHA loan due to the presence of a Homeowners Association (HOA). In these cases, the HOA must apply for approval, and there must be at least 40% owner occupancy to qualify.
When considering an FHA loan, it is important to examine your finances and credit score in advance. FHA loans have basic minimum credit standards, and potential borrowers should be aware of their maximum borrowing power.
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FHA design and construction requirements
The Fair Housing Act (FHA) outlines specific design and construction requirements that must be met for certain multifamily dwellings to be readily accessible and usable by individuals with disabilities. These requirements apply to townhomes under specific conditions.
Firstly, the FHA only applies to townhomes constructed after March 13, 1991. Townhomes built before this date are generally exempt from FHA requirements, even if they undergo renovations or conversions.
For townhomes constructed after the aforementioned date, the FHA applies when specific design conditions are met. One condition is the presence of elevators. If a townhome building has four or more units and is served by an elevator, it is considered an FHA-covered dwelling unit. In this case, the primary entrance level of the townhome must comply with FHA requirements, including providing a usable kitchen and an accessible bathroom.
Additionally, even if a townhome does not have an elevator initially, it may still be subject to FHA requirements if it is designed and constructed for the future installation of an internal elevator. This includes considerations such as electrical wiring and temporary infill flooring.
It is important to note that adaptability is permitted, but only after the minimum design and construction requirements of the FHA are met. For example, the FHA requires light switches to be installed below 48 inches from the finished floor, and this cannot be modified upon request.
While the FHA provides Accessibility Guidelines, these are not mandatory. However, the U.S. Department of Housing and Urban Development (HUD) has clarified that a violation of these guidelines can be used to establish a prima facie case, which can be rebutted by demonstrating compliance with other recognized accessibility measures.
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FHA occupancy requirements
The Federal Housing Administration (FHA) has specific occupancy requirements that must be met for its loans. These requirements vary depending on the type of property and the circumstances of the borrower.
For single-family homes, the FHA requires borrowers to occupy the property as their primary residence for at least the first year. This means moving into the property within 60 days of closing on the home and occupying it for the majority of the calendar year. After this initial period, owners can use the property as they wish, including renting it out or using it as a secondary residence. It's important to note that borrowers cannot have more than one FHA loan at a time, even after meeting the one-year requirement.
In the case of condominiums, the FHA has different approval criteria. To gain FHA approval, condo buildings must have at least 50% occupancy by owners, although this can be as low as 35% if certain conditions are met. These conditions include providing additional documentation, such as financial statements, and meeting specific guidelines for assessment payments and reserve funding.
There are also exceptions to the FHA's occupancy rules. For instance, if a borrower is active military and deployed overseas, they are still considered an owner-occupant if a family member occupies the home or they plan to return after deployment. Similarly, job relocation that takes the borrower outside a 50-mile radius of the home may qualify for an exception. Other exceptions include family expansion, divorce, or other circumstances that may be discussed with an FHA representative.
To ensure compliance with its occupancy requirements, the FHA conducts occupancy inspections. These inspections help verify that the property is being used as the primary residence and is not contributing to neighborhood blight. Borrowers who do not adhere to the FHA occupancy rules may be considered to be acting in "bad faith" and could face legal consequences.
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FHA-approved HOAs
The process of obtaining FHA approval can be challenging and expensive for HOAs, as they must meet strict requirements and adhere to extensive rules set by the U.S. Department of Housing and Urban Development (HUD). For example, the HOA must maintain insurance levels that meet FHA requirements and keep at least 10% of the annual budget and cash reserves. Additionally, buildings must maintain a 50% owner-occupancy rate and be free of any construction defects.
To find an FHA-approved HOA, individuals can search by location, name, or status. It's also important to carefully review the HOA agreement, as it may include restrictions on activities such as renting, subletting, or outdoor smoking.
In some cases, individual buyers may seek FHA loans even if their preferred condo is not in an FHA-approved HOA. This process, known as Single-Unit Approval (SUA) or ""spot approval,"" allows for a case-by-case review of a single unit within a condominium that is not currently on the FHA-approved list. However, SUA has limitations, such as only applying to existing construction and requiring no more than 10% of the project's units to be financed with FHA loans.
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FHA and discrimination
The Federal Fair Housing Act (FHA) applies to most housing situations, including private housing, public housing, and housing that receives federal funding. It protects people from discrimination when they are renting or buying a home, getting a mortgage, seeking housing assistance, or engaging in other housing-related activities. The FHA prohibits discrimination based on race, colour, religion, sex, disability, familial status, or national origin. It also bans discrimination against families with children, although senior housing communities with certain age restrictions are exempt from this rule.
The FHA generally does not apply to owner-occupied buildings with four or fewer units, single-family homes rented or sold without a broker, as long as the owner does not own more than three houses, and housing operated by religious organisations or private clubs that limit occupancy to members. However, even if a property is exempt from the FHA, it must still comply with the law's ban on issuing discriminatory statements, notices, or advertising.
In the context of mortgages and lending, the FHA prohibits pricing discrimination and requires lenders to verify the source of all down payment funds. It also applies to the terms and conditions of homeowners' insurance and multiple listing services or real estate brokers' organisations.
While the FHA provides important protections against discrimination in housing, it is important to note that local or state fair housing laws may exist and prohibit additional forms of discrimination. Furthermore, even if the FHA does not apply to a specific property, there are still many reasons to avoid discrimination, including fairness considerations, penalties for violating fair housing laws, and the potential to attract quality tenants by being more inclusive.
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Frequently asked questions
The Federal Housing Administration (FHA) applies to most housing situations, including townhomes. However, there are some exceptions, such as standalone townhouses, owner-occupied buildings with four or fewer units, and single-family homes rented without a broker.
FHA loans offer several advantages for homebuyers, including low down payment requirements, flexible credit standards, and the ability to finance or refinance improvements on the property.
Yes, there are restrictions on renting out a townhouse financed with an FHA loan. You must live in the property as your primary residence for at least one year before renting it out. Additionally, short-term rentals of 30 days or less are not permitted for properties purchased with FHA loans.
The FHA defines a townhouse as a covered multifamily dwelling with internal elevators or connected to an elevator-served structure, having four or more units within the building.
Yes, under certain circumstances, you can use rental income from your current townhouse to qualify for an FHA loan on a new property. However, the new property must be at least 100 miles away from the current townhouse to comply with the FHA's 100-mile rule.
