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FHA Issues Waiver On Leasing Restrictions

Condominiums have previously been disqualified from FHA financing as a result of  leasing restrictions contained in the community’s governing documents.   FHA regulations have provided that  a mortgatge is not eligible for FHA insurance if the mortgaged property is subject to legal restrictions on conveyance, which includes a restrtiction on leasing found in many condominium declarations or by-laws.  24 CFR 203.41(a)(3).   The intent is to promote housing opportunities without undue restrictions.  Condominium governing documents often permit leasing of units, but prohibit short term leases of less than six months.  Such provisions, which are intended to protect marketability and stability, have run afoul of the FHA requirement that there be no legal restriction on conveyance.

Recognizing that restrictions on leasing are common in condominium communities, and are intended to promote stable property values, on March 18, 2011, the FHA issued a waiver.  The waiver, which runs for a period of one year, removes “lease” from the definition of conveyance contained in the regulation.  Accordingly, mortgages on condominiums with lease restrictions will qualify for FHA financing until March 18, 2012.  The following requirements are applicable:

     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 tenant’s family members who will occupy the unit.

     Unit owners are prohibited from leasing their units for an initial period 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.  (The FHA requires that at least 50% of units be owner-occupied).