FHA Approval and Rental Restrictions

Most folks involved in the condominium industry are, at least vaguely, aware that obtaining FHA approval for condominium projects has become both increasing important, as well as increasingly complicated over the past few years.  Recent changes in FHA approval requirements and FHA policy have had a significant impact on the availability of FHA financing for condominiums (For a more detailed discussion of the FHA approval process, and an explanation of why FHA approval is important to most condominium associations, see the article available at this link: https://vf2022.webuponstaging.com/articles/fha-information/fha-approval-for-condominiums%3A-update).

According to recent research performed by CAI, approximately 60% of the 3,500 condominium projects which have sought FHA approval in 2013 (as of July 21st) have been denied[1].  This article will briefly discuss one of the most frequent reasons that condominium projects are denied when they apply for FHA approval, namely: rental restrictions found in the condominium association’s Declaration of CC&Rs or Bylaws (“governing documents”) contain provisions which violate FHA’s guidelines.  It is interesting, to say the least, that while FHA requires that at least 50% of condominium units in a project must be owner-occupied, FHA also puts significant limits on the ability of associations to “encourage” owner-occupancy.

FHA has recently taken an increasingly strict interpretation of its guidelines regarding rental restrictions.  Interestingly, and somewhat alarmingly, numerous projects that received approval from FHA only two years ago are now being denied by FHA when they apply for re-certification.  It has become a frequent scenario to have applications denied because of rental restrictions which purportedly violate FHA guidelines… even though the exact same governing documents were approved by FHA two years prior.  Accordingly, the fact that a project received approval in the recent past is no guarantee that they will receive automatic approval when applying for recertification the next time around.  Condo associations should be aware of the possibility that they may need to amend their governing documents to comply with FHA guidelines.

If FHA determines that any provision of a condominium association’s governing documents is in violation of FHA guidelines, FHA will refuse to approve the project until the documents have been amended to remove any objectionable provisions.  Over the past year rental restrictions have become a major sticking-point for many condominium associations seeking FHA approval.  FHA permits certain types of rental restrictions, but has strict guidelines (and interpretations of those guidelines) concerning which types of restrictions are permissible and which are unacceptable.

Associations should be aware that the following types of rental restrictions may need to be amended in order to comply with FHA guidelines:

1. Rental caps that permit more than 50% non-owner occupancy.
2. Absolute prohibitions of rentals.
3. Allowing short-term rentals (periods less than 30 days).
4. Allowing leases under which hotel-type services are provided.
5. Exempting mortgagees (lenders in possession of a unit) from complying with rental restrictions.
6. Requiring board approval prior to renting.
7. Requiring certain types of tenant screening.
8. Allowing the board to terminate a rental.

Due to the still-evolving nature of the FHA guidelines, the above provisions should not be considered a complete list of all possible types of rental restrictions that may hinder FHA approval.  Likewise, there are a few exceptions to these general rules.  Some rental restrictions are perfectly acceptable to FHA, some will require subtle amendments of a few words, and others will require a complete overhaul.  Regardless, boards and managers of condominium associations should be aware that rental restrictions may require amendment in order to qualify for FHA approval and should be examined carefully before applying for approval or recertification.

[1] CAI letter to Commissioner of U.S. Department of Housing and Urban Development, dated July 30, 2013.