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I understand that non-residential use must be subordinate to the property’s residential use and character and may not exceed 25% of the total floor space. How is total floor space defined? Does it include a garage and basement? Or is it only a living area?

By Dale B. on 12.16.2018

Hello Dale,

Your question raises an essential point that can be somewhat complex to address without examining the specific property and its commercial usage. It's crucial to understand that HUD (Department of Housing and Urban Development) regulations state that a property with a reverse mortgage must primarily serve as a residential dwelling. Your inquiry reflects language directly from HUD's underwriting manual, which, as you can see, doesn't explicitly define whether "floor space" includes all areas or solely the living space. Consequently, the interpretation is left to the lender's underwriter, with the caveat that HUD retains the right to decline insurance for the loan if they disagree with the lender's judgment.

If there is a small area within the property designated for legal and non-residential use (legally permitted by the property's zoning ordinance) that doesn't compromise its residential nature, that business space should not exceed 25% of the total floor area of the home. However, if you find yourself needing to include the basement and garage to stay within the 25% limit, it's likely that the underwriter may not approve such usage. Approval also hinges on the type of commercial business being conducted on the property.

Certain home-based businesses may only be accepted if they occupy no more than 25% of the home's floor space. For instance, HUD has previously rejected kennels for dog boarding because even though the kennels themselves may not consume more than 25% of the floor space, the animals require more movement area, potentially exceeding the 25% limit.

An example includes a small beauty salon run from home, using approximately 23% of the home's space, yet it was declined because it necessitated signage and parking for patrons on the property. Bed and Breakfast establishments are generally not permitted, even if they utilize only one bedroom that accounts for less than 25% of the space. Working farms are prohibited, and properties with hazardous features like gasoline pumps would not be considered acceptable.

The instances that may render a property ineligible are diverse and numerous.

It's crucial to note that there is no secondary market for reverse mortgage loans that cannot obtain HUD insurance. Unlike forward loans, where lenders failing to meet FHLMC or FNMA requirements can often sell the loan to a specialty source at a discounted price if a HUD Home Equity Conversion Mortgage (HECM) reverse mortgage cannot secure HUD insurance, no other entity can step in to fill the gap. The loan documents even include a provision that allows the lender to call the loan due and payable if it cannot be insured within nine months. This is because an uninsured loan is not suitable for lenders or borrowers. Consequently, lenders exercise greater caution in ensuring that the property meets HUD's eligibility criteria from the outset.

Please don't hesitate to reach out if you have any further questions or need additional information.


Related: Reverse Mortgage Property Requirements (Updated 2024)

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