For those of you who work with condominiums, you know how important FHA approval can be. Without such approval, purchasers can have difficulty obtaining financing for purchasing a condo. (After all, FHA-insured mortgages are between 30 and 40 percent of all condominium mortgages, and FHA insurance is typically required on mortgages where there is less than a 20 percent down payment.)
FHA approval requirements have long been in flux. However, in 2011 and again in 2012, the FHA formalized many of the requirements. At a minimum under the guidelines, to be eligible for FHA financing a condominium must:
- Have at least 2 units.
- No more than 25 percent of the property’s total floor area or unit can be used for non-residential/commercial purposes (although there are some exceptions for up to 35 percent commercial space, and the FHA will consider projects that have greater than 35 percent commercial space on a case-by-case basis).
- In existing associations and certain conversions, an investor may own up to 50 percent of the units if at least 50 percent of the total units have been sold or are under contract.
- The management agreement must give the condominium association the right to terminate the agreement with no more than 90 days’ notice.
- All units must be 100 percent complete.
- No more than 15 percent of units may be more than 60 days past due on association assessments.
A great area of concern has always been rental restrictions in condo documents. Prior to 2008, FHA regulations at 24 CFR part 234 and policy guidance pertaining to the insurance of mortgages on condominiums allowed for certain legal restrictions on conveyance of condominiums and specifically allowed rental restrictions. However, in 2008, new regulations were adopted at 24 CFR 203.41 which prohibited the FHA from insuring a mortgage loan used to purchase a condominium unit if the condominium documents included leasing restrictions. There was such an uproar regarding the provision that the FHA eventually issued a temporary waiver for leasing restrictions, and then subsequently made most of the waiver provisions permanent.
As a result, FHA-insured financing may be used to purchase or refinance a condo unit even if Declaration of Condominium, bylaws, or governing documents restrict a unit owner’s ability to lease their unit so long as the restrictions meet the following criteria:
- All leases must be in writing and subject to the Declaration and bylaws of the association.
- The association may request and receive a copy of the sublease or rental agreement.
- The association may request the name(s) of all tenants, including the tenants’ family members who will occupy the unit.
- Unit owners are prohibited from leasing their units for an initial term of less than 30 days.
- The condominium association may establish a maximum allowable lease term, e.g. six months, twelve months, etc.
- The condominium association may establish a maximum number of rental units within the project; however, the percentage of rental units may not exceed the current FHA condominium project owner-occupancy requirement (owner-occupancy ratio must be at least 50 percent).
NOTE: An association may not require that a prospective tenant be “vetted” or approved by the association or its agents (including as to creditworthiness), and any such current provision will almost certainly jeopardize FHA financing.
So, where does that leave your association?
- If your condo is considering leasing restrictions, any language must fall within the guidelines set forth above.
- If your condo has existing restrictions beyond the permitted list, you should review and consider amending the documents to bring them into compliance with FHA guidelines (the FHA does not permit “grandfathering” or the option of ignoring existing language in governing documents).
Obviously, the FHA guidelines cover many issues beyond this short summary (the guidelines are 95 pages long), and interpretations or “tweaks” are issued by the FHA on a regular basis. As a result, if you have questions regarding current FHA restrictions, you should seek out the current guidelines and an FHA condo professional.