HUD Relaxes Leasing Restrictions for FHA Approval of Condominium Projects
For the purpose of obtaining FHA approval of a condominium project, the U.S. Department of Housing and Urban Development ("HUD") has just announced a waiver on some leasing restrictions in condominium projects. This waiver will be in effect for a period of one year.
As you know, when a condominium project applies to HUD for approval for FHA-backed loans, one of the requirements is that at least 50% of the units must be owner-occupied. That means an association must be able to control the rental of units in the project. An obvious way that associations handle this is through rental restrictions contained in the governing documents of the association.
Unfortunately, an FHA regulation also provides in part, that a “mortgage shall not be eligible for FHA insurance if the mortgaged property is subject to legal restrictions on conveyance . . .” This provision has been interpreted by some regional offices of HUD as a prohibition on leasing restrictions in the governing documents of condominium associations. In fact, many condominium associations with rental restrictions have been turned down for FHA approval.
The good news is that HUD has recognized these inconsistencies and has granted a waiver in order to permit the following rental restrictions to be present in governing documents:
● All leases must be in writing and subject to the declaration and by-laws of the condominium project.
● The condominium association may request and receive a copy of the sublease or rental agreement.
● The condominium association may not require that a prospective tenant be approved by the condominium association and/or its agent(s), including but not limited to meeting creditworthy standards.
● The condominium 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 project may establish a maximum number of rental units within the project; however, the percentage of rental units may not exceed the current FHA condominium owner-occupancy requirements.
We are hopeful this one-year waiver will become permanent as HUD continues to better understand the economic and governance realities of condominium associations.
On a final note, the waiver has not changed the requirement that at least 50% of the units in a condominium project must be owner-occupied.