More About FHA’s Stance on Condominium Leasing Restrictions

HUD_bldgTwo weeks ago, we published an article about some recent clarifications by FHA regarding condominium leasing restrictions.  The article created quite a buzz and generated many calls and email inquiries regarding its content.  This is a follow-up article addressing some of those questions.

The section of the National Housing Act, 24CFR203.41, states that properties encumbered with FHA-insured loans must have free assumability with no restrictions except as stated in the section.  This includes leasing and conveyance restrictions which impact a unit owner’s ability to sell or lease the unit or reduce the unit owner’s proceeds upon sale of the unit.

Is there an FHA document that states these restrictions?  The document by which the leasing restrictions are governed is 24CFR203.41.  Section 1.8.9 of FHA’s Mortgagee Letter 11-22 notes the acceptable leasing restrictions.  Beyond these sources, the list that we provided in the previous article have been compiled by submitting condominium approval packages to HUD and speaking to HUD directly about specific scenarios.

Why can’t the association require that the unit owner own the unit for a period of time prior to leasing it?  This is a direct violation of 24CFR203.41 because it disallows the unit owner the ability to lease the unit during the initial time period, violating free assumability.

Why can’t the association restrict a unit owner’s ability to lease a unit if the owner is delinquent in the payment of common charges?  This obviously prevents the unit owner from leasing the unit same as above.  However, the documents CAN require assignment of the lease payments to the HOA if the unit owner is delinquent but it cannot forbid leasing of the unit.

Why can’t the association require background checks or credit references or checks?  The exception to this is the requirement to check the Registered Sex Offender List.  Other than that, the unit owner cannot be required by the HOA/Board to gather information about the tenant.  The Board cannot request this information or require that the potential tenant (or buyer) sit or interview with the Board.  This constitutes third party approval which is forbidden by 24CFR203.41.

Can the association restrict pets?  From FHA’s standpoint, a condominium can outright restrict pets.  However, it would be wise to check with your association’s attorney in the cases of service animals and those which are therapy animals.  Not exactly sure what this question has to do with leasing but there you go.

On a related note:

The association CAN require Board approval of leases if only to verify that the subject lease does not exceed the maximum leasing percentage or rental cap as stated in the legal governing documents.  Because this would be the sole authority of the Board to approve or reject leases, it is allowed by FHA.


Airbnb and FHA Condominium Approval


One of the topics on HUD’s agenda for the round table session last month was that of “Airbnbs”.  We have to admit that even with all of the condominiums that we have worked with, this was a new concept for us.  None of the legal documents of our condominium clients had any such language in them.

In case this is new to you, Airbnb is when unit owners allow overnight guests or trading of units on a temporary basis.  We understand that this is more common in areas where unit owners can provide an alternative to hotels in resort areas or for large events such as a university graduation.

Airbnb is a topic for discussion for HUD because this falls into the category of transient leasing, which is prohibited by the National Housing Act.  A home, whether it be a single family home, 2- to 4-family home or condominium unit, may not allow leasing for a period of less than 30 days.  Therefore if the condominium consists of Airbnb units, the project is not eligible for FHA project approval or FHA-insured loans.

The obvious dilemma here: how can it be determined if unit owners are offering their units in this manner?  Tracking this would become a nightmare.

HUD has not formally released an update to guidance for project approval to spell out how it will handle Airbnb.

The linked article above regarding transient leasing provides how HUD ruled on that issue.  Basically, if the legal documents are silent on transient leasing or set a minimum lease term of greater than 30 days, the condominium is acceptable.  If the documents allow for lease terms of less than 30 days or provide exemptions for anyone to the minimum leasing period, HUD will require additional documentation for the condominium to acquire approval.

Top Photo Credit: (c) Can Stock Photo / vkoletic

FHA Condo Approvals – Transient Leasing

Salvatore VuonoFHA only allows a handful of leasing restrictions; one of them is that units cannot be used for transient leasing.  FHA also does not allow unit owners to provide hotel-like accommodations for the tenants.  If either of these are allowed in the condominium project, it is not eligible for FHA condominium project approval.

The term transient or hotel purposes is defined to mean:

1.     any rental for a period of less than 30 days, or

2.     any rental if the occupants of the housing accommodations are provided customary hotel services such as room service for food and beverages, maid service, furnishing and laundering of linen and bellboy service.

Prior to the 2013 bulletin, the only way for a project to get approved with HUD if the legal governing documents allowed for transient leasing was to amend the legal documents to remove or revise this language.  This can sometimes be difficult to accomplish as the legal documents often require a 2/3 majority vote in order to amend the documents.

HUD allows for another option.

If the Association is not willing to amend their legal documents, an executed written statement may be provided by the Board that affirms that there are no units within the project currently rented for less than 30 days and/or pursuant to the lessor for providing any services normally associated with a hotel.

On the loan-level, the FHA Originating Lender will also be required to provide an executed written statement that affirms  in the event of a conveyance action to the lender that they will not rent the associated unit for less than 30 days an/or provide any services normally associated with a hotel.

Borrowers will now be required to execute form HUD-92561, Borrower’s contract with Respect to Hotel and Transient Use of Property for all condominium loans using FHA insured financing.  This is the same form required by HUD for loans for 2-4 unit properties.

Image courtsey of Salvatore Vuono/

FHA Clarifies its Position on Leasing Restrictions in Condominiums

HUDsignTallFHA-allowed leasing restrictions in condominiums has been a hot topic as of late.  As we all know, a condominium’s legal governing documents may place restrictions on the leasing of units in the condominium.  These restrictions can vary greatly and recently HUD clarified what is and is not allowable.

[For information on the background of why certain restrictions are not allowed, you can follow THIS LINK to an article about 24CFR203.41.]

During the roundtable session that Eric attended in late August, the facilitator offered this broad statement:

“If the homeowners association has approval authority of a unit owner’s ability to lease his/her unit either directly or indirectly, the condominium is ineligible for project approval with FHA.”

During the ensuing discussion, the following clarifications were offered.

Allowable Leasing Restrictions

The association can

  • Restrict total number of units that can be rented at any given time
  • Restrict the total percentage of units that may be leased at any given time
  • Create a hardship clause for exception to the first two above
  • Require that the Board be provided with a copy of the lease
  • Require that the lease must be in writing
  • Request the names of the tenants
  • Require that the lease conforms to the legal governing documents of the association
  • Set minimum and maximum lease periods
  • Require unit owner to check the Registered Sex Offenders list
  • Require rent to be assigned to association if the unit owner is delinquent in the payment of his/her common charges
  • Provide corporate leasing restrictions
  • Require Board review of lease [May not require approval of lease]
  • Require that the lease be on a specific form

Non-allowable Leasing Restrictions

The association cannot

  • Outright restrict leasing of all units (at least one unit in the condominium must be allowed to be leased) [**See Note below]
  • Require that the unit owner own the unit for a period of time prior to being allowed to lease the unit
  • Require Board/HOA approval of lease
  • Require Board/HOA approval of modifications to, alterations of, amendments to or extensions of lease
  • Be granted automatic power of attorney by the unit owner upon purchase of a unit
  • Restrict a unit owner’s ability to lease his/her unit if he/she is delinquent in the payment of common charges
  • Require potential tenants to sit with the Board
  • Require credit references
  • Require criminal background checks (except for Registered Sex Offenders list)
  • Require Board/HOA approval of tenant
  • Have the power to void leases (leases cannot be voidable by a third party)
  • Allow transient leasing
  • Allow accommodations typically associated with a hotel, such as maid or front desk service.

**NOTE: There are two exceptions where an association can outright restrict leasing: age-restricted communities and condominiums where 100% of the units are under Affordable Housing restriction.

If you have specific leasing restriction questions, please contact us.  We would be happy to answer any of your questions on this matter.

Are Nudist Community Condominiums Allowed by FHA?

vladoCondominiums come in all sorts of shapes and sizes and this one is no different.  Well, it is a little bit different…

There is a condominium project that wishes to obtain FHA project approval for its unit owners and to allow FHA purchase loans.  The sales prices of the units are in FHA’s “sweet spot” so the association is really pushing to get it done.

The project’s composition is acceptable to FHA consisting primarily of residential units with a few commercial components, one of them being a bar/night club.  The project’s financials are up to FHA’s standards and the owner-occupancy rate hovers around 100%.  Unit owners are nearly perfect in the payment of their common charges.  The units are in very high demand and there is a waiting list to move into the community.

All of the major aspects of the condominium meet FHA’s guidelines.  However, the condominium is a nudist community.  This, on its own, does not present a threat to the condominium’s eligibility for FHA approval.    The issue is that all unit owners are required by the legal governing documents to acquire and maintain membership to either a regional or national nudist organization.

This violates the National Housing Act in that it is requiring that the unit owners become members of an outside organization or club.  Because of this, the condominium, and, therefore, the units are not eligible for FHA-insured loans.  This is akin to a condominium requiring the unit owners to join an affiliated golf club or the Master Association’s boating club.

The community is very disappointed in their ineligibility and have verbalized that they are being discriminated against.  First of all, nudists are not a protected class so the accusation is unfounded in that regard.  But second, and most importantly, it is the requirement for membership which renders the condominium ineligible.  If they were to amend the legal documents to remove this requirement, they would be eligible.

Image courtesy of Vlado/

Automatic Power of Attorney is not Acceptable for FHA Condo Approval

gstockstudio_2During the round table session that HUD held in Washington DC recently, it clarified its position on automatic Power of Attorney written into a condominium’s legal governing documents.  If the legal documents grant irrevocable POA to the association simply by the unit owner accepting the deed, the condominium is ineligible for FHA condominium project approval.

We don’t see this language very often but do bump into it now and again, twice yesterday in fact.  The language reads like this:

Each Unit Owner shall and does by the acceptance of his deed grant to the Association of Unit Owners an irrevocable power of attorney, coupled with an interest, to acquire title to or lease any Unit whose owner desires to surrender, sell or lease the same…” [I won’t bore you with the rest of the legal mumbo jumbo.]

In both of these cases, the condominiums were approved by HUD in 2013.  Fortunately, one of them recently recorded its Amended and Restated Declaration and Bylaws and removed the power of attorney section in its entirety.  They will be eligible for approval.  The second is in the process of doing so and will not be eligible for FHA approval until the document is adopted and recorded.  [I offered to review them for compliance with HUD’s guidelines.]

Because it was announced that HUD will begin enforcing the Appendix A Project Certification form, it would behoove any submitter of a recertification package to re-read the legal documents of a condominium to ensure offending language like this does not exist.  As a reminder, the submitter is responsible for the accuracy of the approval package, whether or not he/she signed Appendix A.  Had I submitted these for project approval without re-reviewing them, I would have been subject to fines.

Just because the condominium was approved 2 years ago does not guarantee that it will be recertified.  Not only has HUD modified many of its guidelines for project approval, HUD staff members have become far more adept at reviewing the packages.  This is a perfect example of the need to review the entire condominium prior to submission for recertification.

Top Photo Credit: (c) Can Stock Photo / gstockstudio

Do You Sign Appendix A When You Submit a Condo for FHA Approval?

wanamaker2Recently, Eric attended a two-day session about FHA condominium project approvals with HUD in DC.  Incomplete submissions and the Appendix A Project Certification were among the most important topics discussed.

First off, HUD will only review packages submitted by the following entities: Lender, Builder/Developer, HOA, Management Company, Attorney or Consultant.  They have been receiving packages from real estate agents, mortgage loan officers, unit owners and others.  Moving forward, any packages submitted by any entity who do not belong to the first group will be returned without review.

Secondly, incomplete packages submitted to HUD will be returned to sender prior to review.  It was not mentioned during the session as to whether or not HUD would include which document(s) are deficient.  HUD did say that those submitting approval packages should know what documents are to be included in the submissions.  Which leads to the next, and most important point…

Appendix A: Project Certification… so much to say here…

Appendix A is a signed document whereby the submitter certifies to HUD that: (1) the information and statements are true and correct; (2) the project meets all FHA condo approval guidelines; and (3) there are no known circumstances or conditions that might have an adverse affect on the condominium.  Appendix A was created in 2011 and modified in 2012.

Appendix A must be signed by the submitter.  There are many who submit FHA condo approval packages to HUD that are signed by someone other than the submitter.  Regardless of who signs Appendix A, the submitter is still responsible for the information contained in the submission package and will be treated as if he/she signed Appendix A.

Appendix A will be enforced.  Item #2 on Appendix A states that the condominium meets HUD’s requirements for project approval.  Moving forward, it will be enforced in that:

  1. If the project is not eligible for HUD approval, the submitter may be penalized.  $3500 per infraction was mentioned.
  2. Repeat offenders will be placed on HUD’s LDP list which means that they will not be able to work with HUD in any capacity.
  3. Repeat offenders may be prosecuted.  The maximum penalty for a false certification is up to 30 years imprisonment, $1,000,000 fine or both.

There will be no more “spaghetti tests” where submitters assemble a questionable package and send it to HUD.  If you submit a package to HUD that is not approvable, you could be subject to a $3500 fine.  If you submit many questionable packages, you could face further penalties according to Title 18 U.S.C. 1014 and land on the LDP list.

We have seen many condominiums that were previously approved by HUD that should not have been; everyone makes mistakes or guidelines may have changed since the previous approval.  Submission of these condominiums for recertification may result in penalties as mentioned above.  If you sign Appendix A, you are responsible for the package that is submitted to HUD.

Does HUD Allow Private Transfer Fees?  Yes and No

hennykaOver the past two days, Eric attended a session about FHA condominium project approvals at HUD Headquarters in Washington DC.  There were many topics discussed during the session, some of which are highly classified.  Well, not really because they will appear in future articles…so you’ll have to wait.

One of the major topics of discussion was Private Transfer Fees, aka 3rd party transfer fees, community enhancement fees or any other fancy name that you might have heard.  Basically, these fees are deed restrictions which require the seller of a condominium unit to pay a fee to an entity other than the buyer upon conveyance.  A third party could include a management company, the association or an affiliated or unaffiliated entity.

HUD said that it is encountering an increasing number of condominiums whose legal governing documents require that unit owners pay some sort of 3rd party fee upon the sale of the unit.  These fees are subject to 24CFR203.41.  This section of the Code states that legal restrictions on conveyance may not limit the sales proceeds retained by the seller.  [This doesn’t only apply to condominiums.]

Basically, a condominium’s CC&Rs may not limit the amount a seller may gain from the sale of his/her unit EXCEPT for the exceptions laid out in the section of the code named above.

Because governmental language can be vague at times (ah-hem), the session sought to clarify it as it pertains to condominiums:

  • Third party fees that are administrative in nature are acceptable.  This would include reasonable fees charged by an HOA or management company for the processing of resale packages or for updating the list of unit owners, among other administrative-type duties.
  • Capital contributions are acceptable.  Again, within reason, a requirement for the seller to contribute to the reserve account is acceptable because it is a benefit to the association.
  • Fees paid to affiliated or unaffiliated third parties are NOT acceptable.  These would include required transfer fees paid to entities such as non-profit organizations that are not for the betterment of the condominium.  This could be a topic in and of itself.
  • Fees may NOT be a percentage of the sales price even if the fees belong to the first two categories above.
  • Buyers may NOT pay the fees that are not acceptable.  Even though the section of the Code pertains to the proceeds of the sale to sellers, HUD has determined that buyers may not pay the fees on behalf of the sellers.

If a developer or association wishes to collect the unacceptable fees and still be eligible for an FHA project approval (and, therefore, FHA-insured loans), creating an exemption in the CC&Rs for units encumbered with FHA financing is allowed.  However, HUD does want specific language to be included in order for the project to be eligible.

Top Photo Credit: (c) Can Stock Photo / hennyka

The VA is Definitely Tougher on Condo Leasing Restrictions

small__2832610326In the past month, three of our condominium submissions have been approved by FHA and rejected by the VA – all for leasing restriction language.  Through at least the end of the year, when hired for FHA Condominium Project Approval, we are submitting for VA project approval if requested at no additional charge.  The VA submission package is similar to the FHA submission so we offer to do both.

[For those who don’t know, the VA requires condominium project approval prior to allowing VA financing to encumber any of the units in the project.]

The VA is tougher on leasing restrictions than is FHA, if you can believe that.  The rationale behind it makes sense though: the VA doesn’t want leasing restrictions to impede a Veteran’s** ability to lease his/her unit in the case of deployment.  Therefore, maximum leasing restrictions are reviewed more closely.

Maximum number of leases cannot be established because once this number or percentage is met, no other units may be leased.  It’s not difficult to see that this could impede a Veteran from leasing his/her unit.

Must use a Board-approved lease form or the Board must approve the form on which the lease is written.  This is not allowed because the Board could require a form that is not in compliance with other VA requirements or the Board could reject the form the Veteran has used.

Third-party approval of tenants is also not allowed by FHA.  If the association/Board has the authority to approve or reject potential tenants, most of the time the condominium is not approvable by either the VA or FHA.

Third-party approval of modifications to leases poses a potential restriction for the Veteran.  What if the Veteran wishes to extend or shorten the lease according to changes in his/her deployment period and the Board doesn’t allow it?

Maximum lease period can be an issue for a Veteran if the deployment extends beyond the maximum established lease period.  Fortunately, though, we don’t see this very often.

Often, developers and Boards place the above provisions in place in an attempt to protect the community.  However, in doing so, Veterans are prevented from using their VA benefits to purchase units in the community.

One way to potentially circumvent the above and still obtain a project approval is to include an exception for units that are encumbered with VA financing.  From what we have been told by the VA, this should be allowable in most cases.

**NOTE: the term “Veteran” is being used to conserve space and is meant to represent Veterans, active service members and anyone who qualifies for VA home loan financing.

Our Condominium Has 50% FHA Concentration – Now What?

Oliver26Our first response would be to make sure that you don’t lose your FHA Condominium Project Approval!  Obviously, FHA buyers are attracted to your community so it would be beneficial to the association to maintain this approval (Law of Supply and Demand).

Really, though, the question stems from the FHA guideline that the maximum concentration of FHA loans in a condominium is 50%.  FHA uses case numbers to track all FHA loans and no FHA loan may exist without one.  Once the 50% level is reached, case numbers may no longer be automatically assigned using FHA’s online system FHA Connection.

However, FHA does allow greater than 50% concentration in condominiums that meet its guidelines to be granted an exception.  In these cases, lenders must contact the jurisdictional Homeownership Center (HOC) and request a case number manually.  If the condominium meets the exception criteria, FHA will allow up to 100% FHA loan concentration in the condominium.

All of these criteria must be met in order for FHA to allow the exception:

  • The project must have at least 4 units
  • The project must be 100% complete and has been completed for more than 1 year
  • 100% of the units have transferred from the developer and no one entity owns more than 10% of the units**
  • The project’s budget provides for the funding of a reserve account greater than or equal to 10% of the annual budget
  • Voting control has transferred to the unit owners
  • The owner-occupancy ratio is at least 50%

**Exceptions to the 10% criterion: (1) if the project is 10 units or less, no one person/entity may own more than one unit; (2) Federal, state and qualified non-profit programs may own more than 10% of the units provided that the program is designed to assist low- and moderate- income buyers and renters; and (3) units owned and inhabited by an investor are considered owner-occupied.

The concentration exception terminates with the expiration of the condominium’s FHA project approval.  Once the project is recertified, the concentration exception may be sought again.  Unless HUD changes this with the issuance of another Mortgagee Letter, it can be assumed that exceptions will continue to be granted once the project is approved and continues to meet the above-mentioned criteria.

Top Photo Credit: (c) Can Stock Photo / Oliver26