I Challenge the Assertion the Condo is Not Approvable by FHA

gstockstudio_2This week, I had to pass along news to a property manager that her condominium client was not eligible for FHA approval due to leasing restrictions.  Upon receiving the news, she fired back an email stating that she challenged the assertion because the condominium has “always been FHA approved” and the legal documents have always contained that language.

She went on to say that most condominiums in the area have similar leasing restriction language because it is associations’ only recourse against a problem tenant.

We can certainly understand her frustration.  The condominium was approved with FHA two years ago and the legal documents have not been amended.  Here is my response email:

I can understand your position and had already inquired with HUD before sending the email, below.  However, because the condominium was approved two years ago does not mean that it was reviewed properly at that time nor does it take into account that there have been further clarifications to FHA’s guidance.  I also agree with you that other condominiums have similar language; however, those with identical language would also not be eligible.

Unfortunately, the fact that it “has always been FHA approved” has no relevance to the current situation.  We have had several condominiums that have been rejected by HUD that were approved just two years ago for leasing restriction violations.  HUD changed the qualifications for condominium project approval in written form in 2009 and then again in 2011 and 2012.  It provided written updates and clarifications to the guidance in 2011 and 2013.  It provided verbal clarifications during the Roundtable Sessions that I attended in 2014 and 2015.

However, the underlying law behind all of it is the National Housing Act which is in the Code of Federal Regulations.  In this Section of the Code, it creates the rules for FHA-insured loans.  The Section pertaining to leasing restrictions is 24CFR203.41, which speaks to “free assumability”.  HUD does not have to issue written policy on leasing restrictions because it is already there in the Code.

24CFR203.41(b) states: “Policy of free assumability with no restrictions. A mortgage shall not be eligible for insurance if the mortgaged property is subject to legal restrictions on conveyance, except as permitted by this part.”  You can read the Section of the Regs if you like; I linked to it above.  The exceptions “permitted by this part” are subsections c-g and include:

  • Eligible government or nonprofit programs and specific policies
  • Tax-exempt bond financing
  • 55+ communities
  • Specific jurisdictions (Indian lands, certain Hawaiian home lands, etc)

24CFR203.41(a)(3)(i) states: “Legal restrictions on conveyance means any provision in any legal instrument, law or regulation applicable to the mortgagor or the mortgaged property, including but not limited to a lease, deed, sales contract, declaration of covenants, declaration of condominium, option, right of first refusal, will, or trust agreement, that attempts to cause a conveyance (including a lease) made by the mortgagor to:

(i) Be void or voidable by a third party;” [Emphasis added]

Section 14.1(k) of the Declaration of [name removed] condominium states: “if any Residential Unit Owner/lessor or lessee is in violation of any of the provisions of the lease, this Declaration or the condominium Rules and Regulations, the Association may bring an action in its own name or in the name of the residential Unit Owner/lessor, lessee or both, to have the lessee evicted or to recover damages, or both.

Section 14.3 states: “The Association…shall have the rights of enforcement of any lease4 of a Residential Unit directly against the lessee(s) including, without limitation, the right to terminate any lease by reason of violation…

Because the Association has the authority to terminate leases, it violates 24CFR203.41(b) “free assumability” which renders the condominium ineligible for FHA-insured loans.  This also means that it is not eligible for project approval.

wanamakerFurthermore, I inquired about the language in Sections 14.1(i) and (k) to verify compliance.  In an email from the Philadelphia Homeownership Center:


14.1 (i) is acceptable.

14.1 (k) is unacceptable.


Beyond that, it would be escalated to HUD in Washington, DC.  I verified this very information at the Roundtable on August 27, 2015.  The Association cannot have the power to void leases; it can only levy fines for leasing violations.

Therefore, the condominium will have to remove Sections 14.1(k) and 14.3 in order to be eligible for project approval.”

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.


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.  approvals@readysetloan.com

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

What is a “Co-Housing” Community?

jay_morphoLAOriginating in Denmark, co-housing communities range in size from a handful of units to more than 5 dozen; although typically they contain 20-40 units.  They have a centralized design where the units are either attached or free-standing or both and surround a courtyard and/or common house.  The design is to promote the old-fashioned neighborhood feeling where everyone knows each other and works together.

The common house is the center of the community and usually has a large dining room, kitchen, children’s play area, laundry room, recreational facilities and sometimes even a guest room.  At least a couple of times per week, the community members serve group meals and take turns preparing the meals.  Some communities provide child care services for working parents.

The community members work together to tend to the common elements.  While they operate under set By-laws, generally the decisions are made by consensus and the rules are used as back-up for dispute resolution.  Many of these communities have a waiting list of people who wish to move into them.  Here is a write-up about one in Berkeley, CA.

You may be thinking: “How does FHA handle these communal-type communities?”

Many co-housing projects are legally-declared condominium projects and some have attempted to get approved with FHA.  Some of them have been approved while others are not eligible.  Here are some of the deciding factors:

matt_hintsa1. Communal Kitchens.  There are varying degrees as to the level of “community” between the co-housing projects.  Some attempt to promote a sort of 60’s style commune where everyone works together as one big family.  This can result in co-housing projects only having one communal kitchen and everyone cooks in the kitchen.

The issue that we encounter here is that the individual units do not meet the minimum appraisal standards for FHA which requires the units to have a working kitchen.  Having a communal kitchen is OK provided that the individual units meet FHA’s minimum standards.

2. Screening buyers or renters.  Because the community is so tight-knit, co-housing projects sometimes wish to interview and approve potential buyers or renters.  If these newcomers are going to be in a closely-held community with children, this is not an unreasonable request.

According to 24CFR203.41, third party approval of buyers or renters is not allowed; this violates “free assumability”.  Therefore, the CC&Rs cannot provide for a requirement that the Board or HOA have the power to approve or reject buyers and renters.

The only exception to this rule is that the HOA/Board can use the registered sex offender list to reject a potential buyer or renter.

3. Affordable Housing.  This is a tricky topic on its own regarding FHA condo approvals.  Affordable Housing is allowed by FHA provided that the language in the CC&Rs meets FHA’s standards.  One of the main conditions that it looks for is that the Affordable Housing requirement terminates upon transfer of title of the unit to FHA either via foreclosure or deed-in-lieu.  If the Affordable Housing language meets FHA’s requirements, this is not an impediment to project approval.

In conclusion, if the co-housing project has the look and feel of a typical condominium (typically-sized units, own kitchens, appropriate CC&Rs, etc), then the project has a good chance of getting approved.  If the project appears to be more of a commune-style community, it may have more difficulty in obtaining a project approval.

Condo photo credit: Jay@MorphoLA via photopin cc

Cooking photo credit: matt.hintsa via photopin cc

This Leasing Restriction Will Prevent FHA Condo Approval

elxeneizeI recently fielded a referral from a reverse mortgage broker.  His client lives in a condominium and cannot obtain a reverse mortgage due to the condominium not being on the FHA Approved Condominiums list.  He contacted me to see if we could get the condominium approved.

We take potential clients through a fairly rigorous prequalification process in order to rule out the majority of reasons why a condominium would get rejected by FHA.  On the prequalification questionnaire for this condominium, there were several red flags, many of which are not expected to render the project ineligible due to the potential work-arounds.

The questionnaire stated that there are leasing restrictions in the legal documents.  I inquired as to what these restrictions were and was told that the Board has to approve the leases.  It was further conveyed that the Board reviews the lease to determine if the lease meets the Board’s minimum standards and that it is on the right form.  This by itself does not appear to be in violation of FHA guidelines but I asked for the legal documents to verify this.  The Declaration read:

Without the express written consent of the Executive Board, no Unit Owner may lease or sublease, in whole or in part, any Unit in the Condominium, or license or permit the use thereof by any person(s) other than such Unit Owner. No Unit may be leased except (i) upon a form of lease approved by the Executive Board and (ii) upon the condition that the tenant may not occupy the Unit for a period of more than twelve (12) months (whether continuous or interrupted); provided, however, that the Executive Board may permit one or more renewals or extensions of any lease upon written request from the Unit Owner. In no event shall the Executive Board exercise this right of approval in such a manner as to restrict leasing of Units because of race, color, creed, sex or national origin.” [Emphasis added]

The first sentence of the above paragraph renders the condominium ineligible for FHA approval.  It violates 24CFR203.41 which prohibits a third party from affecting a unit owner’s “free assumability” (except under specific circumstances), or control how a unit owner uses or disposes of his/her unit.  A Board may not have the authority to approve or prevent a unit owner from leasing his/her unit.

The final sentence in the paragraph provides limitations to the Board’s authority.  However, it does not provide any other limitations.  Therefore, it is possible that the Board could prohibit the leasing of a unit because it doesn’t like the unit owner or because it’s raining outside. The middle sentence which is not in bold type contains two restrictions that are allowable by FHA.

If the Association desires to obtain the approval with FHA, it will have to amend the Declaration to either remove the restriction altogether or to specifically state under which circumstances the Board is allowed to reject a lease.  This could be as easy as tying the first sentence to the second stating those are the only two conditions for lease approval.

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