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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 garage and basement? Or is it only living area?

By Dale B. on 12.16.2018

Hi Dale,

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

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 is not going to approve the use.  It’s also going to depend a lot on the type of commercial business at the property.

There are several home-based businesses that would not be acceptable, even if the footprint of the business was 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 permitted and properties with dangerous conditions such as gasoline pumps would not be acceptable.  It would be impossible to touch on all the instances here 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 the world of 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, there is no other entity that 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 9 months, the lender can call the loan due and payable because an uninsured loan is not good for lenders or borrowers.  Therefore, lenders are going to be a little more careful from the onset to be sure the property meets the HUD eligibility requirements from the start.


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