The aim of this study was to identify factors that predict community dwelling (i.e., nonuse of institutional bed-days) among elderly people. This was a longitudinal study of institution use including both short-term and long-term use of hospitals and nursing homes. The impact of health, functional performance, and carrying out the activities of daily living on community dwelling was studied using the method of path analysis. The participants were all the 75-year-old (N = 388) and 80-year-old (N = 291) men and women resident in the City of Jyväskylä, Finland. Predictor variables included disease severity, symptoms of illness, cognitive capacity, walking speed, muscle strength, hearing, and ability to carry out the activities of daily living. The outcome variable was community dwelling. Over 70% of the elderly people had received institutional care during the 5-year follow-up. The path analysis models showed that disease severity and symptoms of illness had an effect on community dwelling: those with a more severe disease or more symptoms needed more institutional care. The effect was also mediated through limitations in physical performance and cognitive capacity and need for assistance in activities of daily living. The explanatory power of these models varied from 23% to 36%. The results of this study suggest that prevention, treatment, and rehabilitation programs aimed at the promotion of community dwelling in elderly people should focus on the severity of diseases, functional performance, and the ability to carry out the activities of daily living.