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.

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