Hi Dale,

This is a great question that is very difficult to nail down without seeing the actual property and commercial nature of the use.  You need to know that the property must be primarily a residential use of the home. Your wording is straight from the HUD underwriting manual, and as you can see, HUD does not specify whether that floor space includes all areas or just the living area.  This leaves it to the lender’s underwriter, but HUD reserves the right to refuse to insure the loan if they disagree with the lender’s decision.   

If it has a small area being used to run a bookkeeping service or some other legal use (legal, in this case, defined as one that is allowed by the zoning ordinance for the property) that does not affect the residential nature of the property, that business must not use more than 25% of the floor area of the home.  If your size is so tight that you must include the basement and the garage to keep it under the 25% maximum, the chances are good that the underwriter will not approve the use.  It will also depend significantly on the type of commercial business at the property.

Several home-based businesses would only be accepted if the company's footprint were just 25% of the home.  For example, HUD has rejected kennels for dog boarding in the past, and the reasoning was that even though the kennels themselves may not have taken more than 25% of the floor space, the animals would have more movement and could not necessarily be restricted to just the 25% restriction. 

A small beauty salon being run out of a home was rejected even though it only used about 23% of the home because it also required signage and parking on the property for patrons.  Bed and Breakfast establishments are not permitted, even if you only use one bedroom and that one bedroom is less than 25% of the space.  Working farms are never allowed, and properties with dangerous conditions, such as gasoline pumps, would not be acceptable.  It would be impossible to touch on all the instances that might render a property ineligible.

Please remember that there is no “scratch and dent” market for reverse mortgage loans that are not eligible for HUD insurance.  In forward loans, if a lender fails to meet the FHLMC or FNMA requirements, they can often sell the loan to a specialty source at a discounted price to free up their warehouse lines. 

If a HUD Home Equity Conversion Mortgage reverse mortgage is originated and cannot be insured by HUD, no other entity can step in and fill in the gap.  There is a provision in the documents that states that if the loan cannot be insured within nine months, the lender can call the loan due and payable because an uninsured loan is not suitable for lenders or borrowers.  Therefore, lenders will be a little more careful to ensure the property meets the HUD eligibility requirements from the start.