April 30, 1996

                                            MORTGAGEE LETTER 96-23

SUBJECT:  Single Family Loan Production - Seven-Unit Limitation

      The seven-unit limitation prohibits any borrower, including non-
profit organizations, state and local government agencies, and private
investors from obtaining FHA-insured financing for a property that may
be rented if it has or will have a financial interest in more than
seven rental units (regardless of financing type) in a contiguous
area, generally defined as within a two-block radius.  This regulation
is designed to limit FHA's insurance exposure on multiple mortgages to
any one borrower in any one area.  The seven-unit limitation appears
in our regulations at 24 CFR 203.42(a) and is also stated in paragraph
3-9 of Handbook 4155.1 Rev-4, Change 1 and, specifically for the
Section 203(k) program, in paragraph 4-6 of Handbook 4240.2 Rev-2. 

      It has come to our attention that there has been some
inconsistency in the application of the seven-unit limitation to non-
profit and governmental mortgagors using Sections 203(b) and 203(k),
as well as private investors using the Section 203(k) mortgage
program, when the stated intent is to resell the mortgaged property to
an owner-occupant.  Some lenders and borrowers have interpreted the
seven-unit limitation as not applicable in these circumstance even
though FHA has never adopted that interpretation in any official
issuance.  Further, although our credit policies permit certain
categories of institutional and investor borrowers to obtain the same
high percentage of financing as typical owner-occupants, we do not
consider these purchasers as "owner-occupants" for any purpose. 
Because of the confusion that apparently exists, we are issuing this
mortgagee letter to clarify the proper interpretation of the seven-
unit limitation.  

      Discussed below are those circumstances where the seven-unit
limitation either does not apply or may be waived by FHA.

I.    Exclusion for Units Under Contract to be Re-sold:  When a non-
      profit mortgagor or governmental entity under any single family
      mortgage insurance program, or a private investor under the
      Section 203(k) program, is acquiring properties, we presume such
      properties are being purchased for rental purposes even if
      homeownership is the eventual goal, and, thus, count those units
      toward the seven-unit limitation; this includes mortgages using
      the escrow commitment procedures under Section 203(k).  However,
      to accommodate those mortgagors that will immediately re-sell the
      properties to qualified occupant owners, this presumption will
      not apply for those units that will be re-sold provided the
      mortgagor can provide conclusive evidence that the properties are
      under contract to the eventual occupying owner.  This, at a
      minimum, requires presentation of a bona fide sales agreement and
      evidence the eventual owner occupying borrower has been approved
      for a new mortgage or assumption of existing mortgage.

      For example, a non-profit may be in the process of purchasing and
      rehabilitating a dozen housing units in one neighborhood, half of
      which will be immediately re-purchased by low- and moderate-
      income first-time homebuyers, all of whom have been pre-qualified
      by the lender for qualifying assumptions.  In this case, those
      units for which there are sales agreements that will be
      consummated once the rehabilitation work is complete can be
      ignored in counting toward the seven unit limitation.

II.   Redevelopment Areas and Section 203(k) Mortgage Financing:  In
      certain areas targeted for redevelopment, 24 CFR 203.42(b)
      provides that the seven unit limitation regulation does not apply
      on Section 203(k) mortgages if:  (1) the neighborhood has been
      designated by the state or local government for redevelopment or
      revitalization and (2) the government authority has submitted a
      plan that clearly defines the revitalization area as well as
      describes substantial public and/or private commitments made to
      revitalize the area.  Therefore, no regulation waiver is needed
      in these circumstances to exceed the seven-unit limitation.  

      The exception for Section 203(k) redevelopment areas is discussed
      in more detail in paragraph 4-6 of Handbook 4240.2 Rev-2. 
      Although no specific regulation waiver is needed, the handbook
      provides for direct involvement of the local FHA office before it
      will endorse mortgages on more than seven units for a borrower in
      the redevelopment area.  FHA does not approve redevelopment plans
      per se, but it does reserve the right to withhold the exemption
      from the seven-unit limitation if the plan does not adequately
      describe the specific targeted area or the extent of the public-
      private commitment to achieve revitalization.  The local FHA
      office may also impose a unit limitation based on the past
      performance of the borrower.  Circumstances that may trigger a
      unit limitation would include when the borrower (a) will own more
      than 10 percent of the housing units in the designated
      redevelopment area or, (b) has more than eight units on adjacent
      lots in the designated redevelopment area.  The FHA office may
      impose whatever unit limitation above seven that it believes is
      prudent under the circumstances and will consider the number of
      housing units in the targeted area as well as the level of
      governmental and private support in making this evaluation. 
      If a lender anticipates processing Section 203(k) mortgage loans
      in a redevelopment area that necessitates an exemption from the
      seven-unit limitation, it must submit a copy of the governmental
      unit's revitalization plan to the local FHA office and also
      identify the purchasing entity.  Generally, those borrowers with
      proven track records in developing affordable housing will not
      have a unit limitation invoked.  The local FHA office has 30 days
      from the time of receipt to notify the lender that a specific
      unit limitation has been adopted for that particular borrower. 
      For all borrowers, the seven-unit limitation of the regulation
      always applies for properties outside a redevelopment area even
      if using Section 203(k) mortgage financing, including the escrow
      commitment procedure.  

III.  Projects in Progress Without Seven-Unit Waivers:  We recognize
      that some lenders and borrowers may have inadvertently
      interpreted our regulations as exempting them from the seven-unit
      limitation and have begun projects that require seven-unit
      waivers.  So as not to disrupt any on-going projects and/or cause
      undue financial harm, the seven-unit limitation in the
      regulations is hereby waived if the borrower can demonstrate that
      the project meets the criteria set forth below.  This waiver
      covers the entire project as presented to the lender when the
      initial loan application was made and includes Section 203(b) as
      well as Section 203(k) financing.  The lender or borrower must
      present the following to the FHA office having jurisdiction where
      the project is located and must do so within 60 days of the date
      of this mortgagee letter in order for the waiver to be

             Project Description.  The project description, as presented
             to the lender, must be submitted to FHA.  It must identify
             the borrower, describe the location of the project and the
             number of units involved, as well as the current status,
             e.g., number of units already mortgaged, units
             rehabilitated, units sold to owner-occupants, etc.  It must
             also describe whether the project is designed for immediate
             re-sales to owner-occupants or as long-term rentals to low-
             and moderate-income families and the type of financing,
             i.e., Section 203(b) or 203(k). 
             Contracts for Purchase and Mortgage Approval.  In
             establishing the on-going nature of the project, the lender
             or borrower must provide copies of the sale(s) contracts for
             the properties that will constitute the project.  The
             mortgage lender must also have issued at least one mortgage
             approval to the borrower within that project prior to the
             date of this mortgagee letter.

      Once this submission is made the waiver will be applicable unless
      the local FHA office, within 30 days of receiving the documents
      and descriptions listed above, notifies the lender or borrower
      that the project does not meet the criteria for a waiver.  FHA
      also reserves the right to withhold a seven-unit waiver if the
      local FHA office has previously acted and declared that a unit
      limitation was appropriate or has denied a seven-unit waiver for
      that specific project.

IV.   Specific Seven-Unit Waivers:  If a mortgage (whether insured
      under Section 203(b) or 203(k)) is subject to the seven-unit
      limitation as described by this mortgagee letter, and the
      preceding waiver for projects in process does not apply, the
      mortgage will not qualify for insurance unless a waiver is
      granted by the Federal Housing Commissioner.  All waiver requests
      must originate with the FHA office having jurisdiction where the
      properties are located and must have the recommendation of the
      local office when it is forwarded to FHA Headquarters.

      In evaluating whether or not good cause exists to grant a
      specific waiver to the seven-unit limitation, FHA will consider
      whether its exposure to insurance risk is acceptable.  This
      evaluation may include, but is not limited to, an assessment of
      the track record and experience of the borrowing entity, the
      anticipated absorption rate of those properties into the rental
      or re-sale market, whether the seven-unit waiver will help
      contribute to additional affordable housing opportunities in the
      area and/or result in substantial rehabilitation of an area.   
      For non-profit agencies and governmental units, these specific
      waivers may include the use of Section 203(b) or Section 203(k)
      rehabilitation mortgage insurance.  For private investors, the
      waiver may only be granted for Section 203(k) mortgages. 
V.    Condominium Information:  As stated earlier, although we permit
      certain non-occupying borrowers the same percentage of financing
      as available to typical occupant-owners, such mortgages are not
      considered as having been made to owner-occupants.  This, among
      other things, precludes the use of adjustable rate and graduated

      Similarly, such mortgages in Section 234 condominium projects do
      not count toward the owner-occupancy requirements that must be
      met before FHA will insure any mortgages within the project. 
      Specifically, statute requires that 80 percent of all FHA-insured
      mortgages covering units in a condominium project be occupied as
      principal or secondary residences, and our regulations further
      require that 51 percent of all units in the project, including
      those with FHA-insured mortgages, be occupied as principal or
      secondary residences.  The 80 percent owner-occupancy requirement
      may not be waived.


            All borrowers, regardless of type (non-profit, private
             investor, state or local government agency) are subject to
             the seven-unit limitation.  

            Properties that will be immediately re-sold to actual owner-
             occupants may be exempted from counting toward the seven-
             unit limitation provided sales agreements are executed and
             the owner-occupant mortgagors are pre-qualified (see I,

            Section 203(k) mortgages in certain redevelopment areas are
             exempt from the seven-unit limitation unless the local FHA
             office determines that a unit limitation should apply.  This
             does not require issuance of a specific waiver identifying
             the borrower or location of the properties but does permit
             the local FHA office to withhold the exemption (see II).

            For on-going projects (except those granted exemptions in
             redevelopment areas using Section 203(k) mortgage
             insurance), an automatic waiver applies provided that the
             local office receives the required submission documents
             within 60 days of this letter and the project meets the
             criteria described previously.  The waiver may include
             either Section 203(b) or Section 203(k) mortgages (see III). 

            Those circumstances not qualifying for exemption or
             automatic waiver (as described in II and III) must apply to
             the local FHA office for a specific seven-unit waiver (see

            Condominium units that are owned by non-profit agencies,
             government agencies and private investors, do not count
             toward the 80 percent and 51 percent owner-occupancy
             requirements (see V).

      If you have any questions regarding this issue, please contact
your local FHA office.  

                                      Nicolas P. Retsinas
                                      Assistant Secretary for Housing-
                                        Federal Housing Commissioner