Understanding FHA Regulations On Condo Communities

One difficult subject facing condo communities is the regulation of rentals in a condo building.  This is often difficult to monitor and keep track of, and traditional homeowners and investors have differing views on how the community should be regulated in this light.  On top of this, the FHA has strict regulations in place that communities must follow in order for home buyers to be able to get loans.  In this article, I’m going to explain how these FHA regulations affect communities, and how associations can go about managing the rules in their covenants. 

First off, a little background on why these rules are generally put in place.  The FHA was established in 1934 as part of the National Housing act, and was charged with regulating the mortgage industry.  Over time, the FHA started financing housing projects and also guaranteeing loans, to promote home ownership and provide lower income citizens the opportunity to own a home.  

Today, about 15% of all home loans are guaranteed by the FHA.  In order to preserve the value of the properties the FHA was underwriting, they put regulations in place that condo associations must follow in order for borrowers to be eligible for loans.  These regulations, among other things, include a restriction of the number of rentals in a community.  There has often been the perception, justified or not, that if a community has a sizable number of owner occupied units, the values of those homes are going to be more stable and the condo will be better maintained than if there are predominantly rentals in the community.  

You may ask- if only 15% of loans are FHA loans, and FHA loans are geared towards lower income residents, why should my community be concerned about following these rules?  Yes, some communities choose not to become FHA certified and remove these restrictions from their covenants to allow open leasing, however, there are a number of disadvantages to this. 

First, homeowners who live in and invested in the community thinking it would predominantly be owner occupied, might have a big issue with their community becoming filled with rentals.  Even if the covenants can be changed to allow more rentals with a 2/3 community vote, it may open up the association for lawsuits by homeowners who did not want the community to be filled with predominantly investment properties.  

Second, many lenders and underwriters of loans who are not seeking FHA guarantees may see a revocation of the FHA approval as a bad mark on the property, and may also choose to not underwrite loans for your condo.  So, the lack of a FHA approval can also hinder the acceptance of traditional loans on your property and can demonstrate that it might be a riskier investment.  

Third, some home buyers may be turned off and not want to live in a community with predominant investment homes.  

These reasons can lower home values in a community, and make it difficult to sell your condo.  

So, generally, home owners associations restrict the number of condo owners who can rent their units, and generally between 25% and 50% of homeowners are allowed to rent in the community at any one time.  At the current time, the will not underwrite any loan on any property composed of more than 51% of rentals on the property.  If there are more than this percentage of homeowners who want to rent, the HOA maintains a wait list of other homeowners who are waiting for the opportunity to rent their unit.  The list of homeowners who have been authorized to lease is called the active leasing list.  Sometimes this list gets rather long, and it is common for homeowners to wait several years for the opportunity to rent their unit.  The only way for someone on the wait list to be given authorization to lease is for an authorized rental unit to be sold or that landlord misses a deadline set forth by the HOA while their unit is vacant.  The community covenants, which are always created by a qualified real estate attorney, specifies these rules in detail.  

A rental is usually defined in the covenants as an ‘owner occupied property’, which can be defined loosely, depending on how often the owner actually lives on the property.  The HOA and the association attorney often make guidelines on how specifically they define an owner occupied unit, and what burden of proof they may require a homeowner who may appear to have tenants inside their unit. 

There are a number of items that HOA can ask the homeowner for to make sure they comply with all the leasing rules set forth in the Covenants.  The HOA may choose to request proof from a homeowner they occupy the unit, including utility bills, drivers license, or automobile registrations showing the condo address and name of the homeowner.  The HOA may also require you to provide a copy of the lease, if you are authorized to lease, as well as information about your tenants that occupy the unit. 

The FHA actually regulates what items a HOA can ask of a homeowner, and what items are not appropriate.   

Appropriate Leasing Restrictions*

The association can...
- Limit the total number of units or percentage of units that can be rented at any given time
- Allow homeowners to apply for hardship exemptions to property limits
- Require that the Board is provided a copy of the lease
- Require Board review of lease
- Require that the lease be on a specific form
- Require that the lease is in writing
- Ask for the names of tenants
- Require that the lease conforms to the legal governing documents of the HOA
- Set minimum and maximum lease periods
- Restrict business leasing
- Require homeowner landlord to check the Registered Sex Offenders list
- Require rent to be diverted to association if the unit owner is delinquent in the payment of dues

Forbidden Leasing Restrictions*

The association cannot…
- Disallow leasing of all units (at least one unit in the condo must be allowed to be leased)
- Require that the homeowner own the unit for a period of time before being allowed to lease
- Restrict a unit owner’s ability to lease their unit if they are delinquent in the payment of dues
- Require credit references or criminal background checks (except for Registered Sex Offenders list)
- Require HOA approval of lease
- Require HOA approval of modifications to or amendments to the lease
- Require Board/HOA approval of tenant or tenant to have to meet with the Board
- Have the power to void leases (leases cannot be voidable by a third party)
- Allow transient leasing
- Allow accommodations typically associated with a hotel, such as maid or front desk service.

Administering Leasing Lists

So, how do HOAs generally manage leasing from an administrative standpoint? 

It is common for property managers to maintain a spreadsheet of all homeowners on the active leasing list and wait list, and for homeowners and the property manager to exchange emails in order to provide leases and keep the tenant information updated in the HOA records.  It is important to keep this information updated as the FHA routinely does audits of condo records and this leasing information has to be compiled and sent to the FHA for them to keep underwriting loans for the condo property.  

The OwnerGo ‘Primalease’ feature can be used by any HOA to automatically manage these leasing lists, where the homeowner updates their web profile with their tenant information and signed lease, and the property manager can approve leases with the touch of the a button.  Homeowners can also view the active leasing lists and wait lists to see their current status and any applicable deadlines they may have.  OwnerGo manages these leasing lists with specific values from your covenants, like the minimum and maximum length of leases, or the number of days a homeowner has to find a new tenant once their lease ends.  

*Please consult a qualified association attorney for legal advice on restricting leases on your property.  

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Posted by Kyle Montgomery

Kyle is the founder of OwnerGo and writes regularly to help homeowners, managers, and board members streamline their community operations. He has 15 years' experience working in the data processing sector, working with hundreds of companies to help automate financial, human resources, and material management data. He has spent 6 years as a board member of his home owners' association, which had an annual budget of over $800,000. He currently lives in New York City.