Owner-Occupancy Ratios: Irrelevant For PUDs & Owner-Occupied Condos

A very seasoned broker asked me about owner-occupancy ratios for PUDs and condos recently, so I thought it was a good time for a reminder.

Owner-occupancy ratios are irrelevant for all PUDs (no matter the loan amount) and also for owner-occupied condos.

Owner-occupancy ratios only matter for condos purchased by investors (when owner-occupancy ratios need to be over 50%).

As for the differences between a condo and a PUD, I am repeating the below blog from 2019.

PUD vs. Townhouse vs. Condo

This is another reminder that condos are not distinguishable from PUDs (Planned Unit Development units) by appearance alone.

Attached side-by-side two-story units that all touch the ground can be zoned “CONDO” or “PUD.” Complexes with units that “float” (that do not touch the ground) will almost always be zoned condo (PUDs must touch the ground).

People often refer to PUDs as “townhomes,” but “townhome” is just a style and not a formal zoning designation.

With PUDs, the owner owns the actual lot or ground underneath the unit.

With condos, the owner owns an equal and undivided interest in the entire condo project’s lot (and common areas).

The way to know the actual zoning is to look at the legal description; a PUD will have a separate lot # and/or a small lot size under it, i.e. 2,200 square feet.

A condo will have the same lot # as all the other condos, or NO lot # at all, and/or a very large lot size (such as “11 acres”) under it.

Why The Difference Matters

  1. Interest Rates. Condo financing comes with higher interest rates whenever the loan-to-value (LTV) ratio is over 75%, and the rate-difference gets larger as the LTV climbs. PUD interest rates are the same as single-family home interest rates.
  2. VA & FHA. Condos are ineligible for FHA and VA financing unless the entire complex is approved. PUDs are always eligible for both FHA and VA financing.
  3. HOA Certifications/Condo Rules. With PUDs, lenders do not need an HOA certification or anything of the like. With PUDs, lenders also don’t need to worry about all of the restrictions that come with condo financing like owner-occupancy ratios, HOA litigation, concentration rules (prohibiting one owner from owning over 20% of the units), commercial use, etc.
  4. Appraisals. Appraisers use different forms for condo appraisals vs. PUD appraisals; appraisals are invalid (worthless) if the wrong form is used. This is why lenders and appraisers need to know the correct zoning/designation upfront. I have seen numerous transactions where the wrong type of appraisal was ordered, and the wrong interest rate was quoted because the wrong designation was indicated in the MLS listing or in other documents/information sources.

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Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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