FHA Clarifies Position on Lending Guidelines and Leasing Restrictions

Many condominium associations have restrictions limiting an owner’s ability to lease their property.  These provisions are intended to preserve property values and protect unit owner quality of life.

However, such restrictions may limit financing options for prospective purchasers.  Recently the U.S. Department of Housing and Urban Development (“HUD”) clarified whether certain leasing restrictions within a condominium association’s governing documents would disqualify owners or potential buyers in the community from obtaining Federal Housing Administration (“FHA”) mortgage insurance.  

FHA mortgage insurance on loans allows borrowers to make lower down payments and requires less rigorous credit score requirements.  HUD is responsible for establishing eligibility requirements for FHA mortgage insurance and has adopted a policy of “free assumability.”   HUD’s policy limits the restrictions which can be placed on the sale or lease of property with an FHA insured mortgage.

Some of the disallowed restrictions include:

• Outright prohibition of leasing, unless the community is age-restricted or where all units are under Affordable Housing restrictions
• Restrictions on leasing unless owner has occupied or owned the unit for a period of time
• Board approval of lease or tenant
• Board approval of modifications to, alterations of, amendments to or extensions of lease
• Automatic power of attorney by the unit owner upon purchase of a unit
• Unit owner prohibited from leasing unit if delinquent in the payment of assessments
• Potential tenants required to interview with the board of directors
• Require credit references
• Require criminal background checks (except for registered sex offenders list)
• Association authorization to void leases
• Allowing transient leasing

Allowable restrictions include:

• Restrict total number or percentage of units that can be rented at any time and allow hardship clause exceptions
• Set minimum and maximum lease periods
• Require specific lease form
• Require association to receive a copy of the lease
• Require names of tenants
• Require the lease be in writing
• Require the unit owner to check the registered sex offenders list
• Require rent to be assigned to the association if the unit owner is delinquent in the payment of assessments

While the inability of some purchasers to obtain FHA loans may decrease the pool of potential purchasers in any given condominium, many communities are undeterred and continue to adopt rigid leasing restrictions.  Other communities are ok with not having FHA insured loans within their communities reasoning the low loan to value ratio makes the prospect of default more likely.  

Whatever side of the issues a community falls on, it is important the condominium association understand the ramifications of its restrictions so that it can make sound business and legal decisions.  Condominium associations should review any current or proposed leasing restrictions with experienced legal counsel to determine what affect such restrictions have on financing in the community.