What the test measures
A mixed-use condominium is one building containing both residential units and non-residential space: shops at street level, offices on a mezzanine, a restaurant, a medical suite, a commercial parking operation, a school or a place of worship. The rule that concerns lenders asks a single question — what share of the project's total floor area is commercial or non-residential?
Three features of that question do most of the work.
It is floor area, not units. A building with 40 residential units and 3 commercial units is 7 percent commercial by unit count. If those 3 commercial units occupy two full floors of a six-story building, the floor-area answer is entirely different. Anyone quoting a ratio should be asked which one they measured.
The denominator is the whole project, not the residential portion. Adding commercial floor area therefore moves both halves of the fraction, which is why intuition about the number tends to be poor.
The category is "commercial or non-residential", which is broader than "shops". Space that generates no rent can still be non-residential. Where a building's space is allocated between residential and other uses is set out in the declaration and the recorded plans, and those documents, rather than a lender's impression from the pavement, are the source.
The underlying concern is straightforward. A residential mortgage is priced on residential collateral. Where a large share of a building is commercial, its value moves with commercial leasing markets, its systems and insurance behave differently, and its association is running two businesses rather than one. At a small share none of that dominates. At a large share it does, and the rules draw a line between the two.
The 35 percent line, and who applies it
Three of the four rulebooks converge on the same figure, which is unusual enough to be worth noting.
Fannie Mae. The Selling Guide topic on ineligible projects, version dated 5 August 2026, states that no more than 35 percent of a condominium or co-operative project may be commercial space.
Freddie Mac. The published position reaches the same place with additional specificity for small projects. Freddie Mac's frequently asked questions on condominium unit mortgages state a 35 percent commercial-space limit for projects of 5 to 10 units that are part of a master association, and for projects of 2 to 4 units a limit of no more than one commercial unit. In a four-unit building, in other words, one commercial unit is the ceiling regardless of its size.
FHA. HUD's standard, announced with the 2019 condominium rule, is that commercial and non-residential space within an approved condominium project must not exceed 35 percent of the project's total floor area, stated in HUD's press release of 14 August 2019. Unlike the agencies, FHA publishes a route above the line: Form HUD-9992, the project approval form revised 25 February 2025, refers to an exception percentage range for projects exceeding the standard limit. A high commercial share is therefore a reviewable condition for FHA rather than an automatic bar.
VA. There is no commercial-space percentage in VA's condominium regulations at 38 CFR 36.4360 to 36.4362. VA's approval is a review of the project's legal documents — the declaration, the bylaws and the enabling instruments — against required rights and prohibited restrictions. The composition of the building's floor area is not among the things those sections test. Where a mixed-use project has clean documents, this is one of the situations in which VA's different approach produces a different answer from everyone else's.
Why the FHA number moves without a rule change
This is the structural fact that explains why so much published content on FHA condominium rules is stale, and it applies well beyond commercial space.
The 2019 final rule deliberately put ranges into the regulation and left HUD free to set the operative figure anywhere inside the range by notice or handbook, without new rulemaking. For commercial and non-residential space, 24 CFR 203.43b permits a limit between 25 and 55 percent of total floor area. HUD set it at 35 percent. Before the 2019 rule the limit was 25 percent, with exceptions available to 49 percent. When HUD narrowed the proposed ceiling during rulemaking, it explained the choice as acknowledging the future potential of mixed-use development while avoiding risk to the insurance fund.
The consequence for a reader is direct: an FHA percentage without a date is not information. The number can change through a handbook update that no press release accompanies. The regulation is the durable part; the operative figure is not. The same mechanism governs FHA's owner-occupancy minimum, its insurance concentration ceiling and the share of a project available for single-unit approval, each of which the regulation expresses as a range.
The regulation also carries a requirement that sits behind all of the percentages: a project must be primarily residential in nature and not intended for rental for transient or hotel purposes. A building can satisfy the arithmetic and still fail that sentence, and a heavily commercial project with hospitality operations is being assessed against both.
The related test buyers miss: business income
Commercial floor area is a measurement of space. There is a second, separate rule about money, and it catches projects that pass the floor-area test comfortably.
Fannie Mae treats a project as ineligible where the association receives non-incidental business income exceeding 10 percent of its budgeted income, with 15 percent permitted in specific circumstances involving recreational amenities and units acquired through foreclosure. The distinction being drawn is between an association that collects assessments to run a building and an association that has become the operator of a business. Income from a commercial tenant the association itself leases to, from a parking operation it runs, from a restaurant concession, or from amenities sold to non-residents all sit in that analysis.
Note how the two rules can pull apart. A building can have a small commercial footprint that the association leases out very profitably and fail on income while passing on floor area. It can also have a large commercial footprint owned entirely by third parties, from which the association receives nothing, and pass on income while straining on floor area. Ask both questions.
Two further items belong beside this. Mandatory recreational leases and required third-party amenity memberships are a separate ineligible category — an arrangement obliging owners to lease recreational facilities or to buy a membership in a club they do not own. And live-work projects that do not comply with local zoning are ineligible, which is a reminder that the commercial question has a municipal dimension as well as a lending one.
What people get wrong
Ground-floor retail is not a problem, and this is the correction most buyers need. The overwhelming majority of mixed-use residential buildings have a commercial share in the single digits or low teens as a proportion of floor area. A coffee shop, a dry cleaner and a dentist beneath eight floors of apartments are nowhere near 35 percent. Being told a building is "mixed use, so it may be non-warrantable" is being told about a category rather than about a measurement.
Counting units instead of floor area produces the wrong answer in both directions. Large-format commercial space in a small residential building understates on units and overstates nothing; small kiosk units in a large tower overstate on units. Only floor area is the test.
Parking and amenity space is where the argument usually is. Whether a garage is residential parking, a commercially operated facility, or common element affects the calculation and is answered from the declaration and the recorded plans rather than from observation.
A hotel portion is a different problem entirely. Where the non-residential space is a hotel, or where the project offers hotel-type services, the analysis moves from a floor-area percentage to the transient-use rules, which are an outright bar rather than a threshold. Do not treat a hotel component as a large commercial component.
It is generally not fixable. Reserve funding can be raised, insurance replaced, delinquency collected, repairs completed. The proportion of a building given over to commercial space is a physical and legal fact fixed at construction and recorded in the declaration. Where a project genuinely exceeds the line, the realistic responses are FHA's exception route, VA's document-based review, or lenders that keep the loan on their own balance sheet.
What to do about it
Get the number, and get how it was calculated. Ask the association or the lender for the commercial floor area, the total project floor area, and the source. The declaration and the recorded plans and plats are where the allocation lives. A ratio quoted without its two inputs is not usable.
Ask what is in the commercial space today, and what the documents permit tomorrow. A vacant retail unit is still commercial floor area. More importantly, the permitted-use provisions of the declaration determine what can arrive later, and a building whose documents permit a restaurant, a bar or a club has a different operating and insurance profile from one that permits professional offices, even if today both are empty.
Ask separately about association income. What proportion of budgeted income comes from anything other than assessments, and from what source. This is the test most likely to surprise a buyer in a building with a small but heavily used commercial component.
Check the loan type against the right rulebook. The four rulebooks are separate and a project can pass one and fail another. If the loan is FHA, the 35 percent standard announced in 2019 carries an exception route above the line, and the lender can pursue it. If the buyer is eligible for a VA loan, the absence of any commercial percentage in VA's regulations means a heavily mixed-use project may clear a document-based review that would fail an agency ratio test. That asymmetry is worth raising with the loan officer explicitly, because it rarely comes up unprompted.
Know the boundary. Floor-area measurement is a technical exercise for an architect or surveyor working from the recorded plans, not something to estimate from a site visit. How the declaration allocates space between residential, commercial, common and limited common elements is a question for a real estate attorney. And whether a particular commercial use complies with local zoning is a question for the municipality.
Common questions
How much commercial space can a condo have?
No more than 35 percent of the project may be commercial space under Fannie Mae's Selling Guide topic on ineligible projects, version dated 5 August 2026. FHA applies the same 35 percent of total floor area, announced with the 2019 condominium rule, with higher percentages available by exception. Freddie Mac states 35 percent for 5 to 10 unit projects that are part of a master association and a maximum of one commercial unit for projects of 2 to 4 units.
Is the ratio based on units or square footage?
Floor area. FHA states the test as a share of the project's total floor area, and the agencies apply it to the project as a whole rather than to a count of units. The two measurements can differ sharply: three large commercial units in a forty-unit building is a small number on a unit count and can be a large one on floor area. Always ask which measurement produced any ratio quoted to you.
Does mixed-use make a condo non-warrantable?
Usually not. Warrantable means the project meets the standards that let a lender sell the loan to Fannie Mae or Freddie Mac, and mixed use fails that test only where commercial floor area exceeds 35 percent of the project. Most residential buildings with ground-floor retail sit far below the line. The associated tests worth checking are the association's non-assessment income and whether any commercial component involves hotel-type operation.
Why do older articles say the FHA limit is 25 percent?
Because it was, before the 2019 condominium rule. The pre-2019 limit was 25 percent with exceptions available to 49 percent. The rule replaced fixed figures with a regulatory range — 25 to 55 percent of total floor area at 24 CFR 203.43b — and left HUD to set the operative figure inside it by notice or handbook, without new rulemaking. HUD set 35 percent. The number can move again the same way, which is why an FHA percentage without a date should not be relied on.
Does the VA have a commercial space limit for condos?
No. VA's condominium regulations at 38 CFR 36.4360 to 36.4362 contain no commercial-space, owner-occupancy or concentration percentage. VA reviews the project's legal documents against a list of required rights and prohibited restrictions instead. A heavily mixed-use project with clean governing documents can therefore clear VA review while failing an agency floor-area test, and the reverse is equally possible.
What is non-incidental business income?
Income the association receives from operating a business rather than from assessments — leasing commercial space it owns, running a parking operation, selling amenity memberships. Fannie Mae treats a project as ineligible where such income exceeds 10 percent of budgeted income, with 15 percent permitted in specific recreational and foreclosure-related circumstances. It is a separate test from commercial floor area and a project can pass one while failing the other.