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

Royal Villas Condos in Newington CT – Now FHA Approved!

ArcadyWe are pleased to announce the FHA Approval of Royal Villas Condominiums in Newington, CT.  FHA loans may now be utilized to finance units in the community.  Royal Villas joins the group of 12 condominiums that are FHA-approved in Newington.

The process to obtain the approval took longer than average.  Royal Villas was denied approval from FHA in 2013 due to a leasing restriction.  The restriction stated that a unit owner must own the unit for 12 months prior to leasing it.  This is an attempt to keep investors out of the community.  This restriction violates “free assumability” as it prevents the unit owner to dispose of his/her unit as he/she sees fit.

Understanding the need to obtain the FHA approval and hiring a professional to assist, the property manager contacted us in March to aid in the approval process.  The first step towards approval was to amend the Declaration and By-laws to remove the leasing restriction.

Working with the association’s attorney, we assisted in drafting the amendment such that the language would be acceptable to FHA.  The process of amending a legal document for this association required an affirmative vote of at least 75% of the unit owners and no objection by the mortgagees.  If the revised language wasn’t acceptable to FHA, we would have to go through the amendment process again.

Once the vote passed and the amendment was recorded, a complete package was sent to FHA.  The project was approved two weeks later and the Board of Directors could not have been more pleased.

Incidentally, there is an additional leasing restriction contained in the legal documents to limit the number of units that may be leased at any given time.  The restriction states that no more than 10 units may be leased at any time.  It goes on to say that an additional 7 units may be leased if the unit owner can provide evidence of financial hardship.

Note: While this may appear to constitute third party approval, it is acceptable to FHA because the first 10 units do not require Board approval.

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