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.

 

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