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

New Level of Scrutiny in FHA Condo Project Approvals

wanamaker2In February, we were saddened to learn of the retirement of the Chief in FHA’s Philadelphia Homeownership Center (PHOC).  We had a great working relationship with her and had met her in 2014 at the Round Table sessions in Washington DC.  A few weeks ago, she was replaced and since then, we have seen some changes in procedure and the level of scrutiny.

One of the major procedural change that has taken place is when a condominium project approval file gets rejected.  Previously when a file was rejected, we would submit the conditional documents and the file would go back in queue.  This meant that it would go back to the bottom of the stack of files and could take another 2-3 weeks to be reviewed…even if it was only one or two small documents.

Now, we are given 5 calendar days to submit the missing documents/information.  If we adhere to that timeframe, the file will stay in the process rotation and will be reviewed as if it were at the top of the pile.  The only problem with this is that we are almost always going to lose two days (the weekend) because it’s 5 calendar days, not 5 business days.  All of our rejections over the past month have come on a Thursday or Friday.

A reviewer in Philadelphia mentioned to us on the phone last week that the new Chief is particularly sensitive to the financials of the condominiums.  They are more highly scrutinizing condominiums which currently have a year-to-date loss or those who posted losses in the previous fiscal year.  Requests for letters of explanation regarding the losses, up to 3 previous years’ income and expense statements and year-to-date income statements have been requested of us to explain even small losses.

We have also been told that now all files have to pass QC, which can delay the processing time of the files.  The reviewer mentioned to us that the QC team is currently about a week out to review files.  This means that after the reviewer approves the file, it will take at least another week for QC to review it.

Eight of our ten submissions prior to the change were approved on their first pass.  Since then, 6 out of 8 have been rejected; 5 of them were due to financials.

The bottom line is to be patient when submitting FHA condominium project approvals to Philadelphia.  HUD sometimes makes internal changes that it doesn’t notify the public about.  We only learn of them when files get rejected for reasons which we have never seen.  This can delay processing times at first but once we adapt to the changes, they become standard procedure.

…until the next round of changes.