Reader Questions - FHA Condo Loans, Rental Limits

Dear Kelly,

Enjoy reading your weekly articles in [the paper]. I own a condo that is for sale. My agent tells me she had two offers with VA loans, but the development is not approved for VA or FHA loans. Never heard of such a situation, please enlighten me.

Thanks,

R.W., Fallbrook

Dear R.W.,

In 2009, the FHA, VA, and FNMA (“FannieMae”) changed their lending approval practices for condominium homes, and stopped approving individual condominiums for loans. Instead, they began requiring that the entire project had be certified as meeting certain minimum requirements before FHA or FannieMae would issue loans on any units in that project. These nationwide requirements were imposed without the approval of any elected official.

Originally the requirements were very strict, and many if not most condominium projects could not qualify. The requirements were eased slightly in 2013, but are still not easy for associations to meet. [In your county, per the HUD website, www.HUD.gov, of the over San Diego County 6,100 HOAs, only 341 are HUD “approved”, 1077 are VA-approved.] Assessment delinquencies of 60 days or more cannot exceed 15%. A minimum 50% must be owner-occupied. In mixed-use projects, no more than 25% of the space can be non-residential. At least 10% of the budget must be capital reserve fund contributions. For more information, visit www.HUD.gov or www.vamortgagecenter.com.

Thanks for your question,
Kelly

Hello Mr. Richardson,

First of all, thank you for all the wonderful advice you provide in your column in the paper.

I own a condominium in a small complex. Just under half of the units are currently rented. Another owner is trying to sell their unit and told the board that the potential buyer has a hard time acquiring a loan due to the high percentage of rented units.

What is the best ratio of owner-occupied versus rented units in a small complex like ours? When limiting the units rented, can the board members make an addendum to the CCR? How do we “grandfather” this in?

How can we be fair? How can other owners be ever able to rent out if we limit the unit numbers available for renting?

Thank you very much. Sincerely,

S.Z., Arcadia

Dear S.Z.,

It may be that your association is too close to the maximum rentals allowed for FHA/FNMA lending standards, which currently is 50%. However Congress may liberalize this, if HR 3700 becomes law, as Section 301 of that legislation would increase the allowed rental percentage to 65%. The bill would mandate other changes to make lending approval for condominium associations more attainable.

Some associations amend their CC&Rs to limit the number of rentals, to try to meet the FHA/FNMA/VA project requirements. This would take a membership vote.

However, under Civil Code 4740, rental limits adopted in 2013 or later would only apply to buyers who acquired condominiums after the rental maximum was imposed, so every current owner still could also rent, not just those currently renting.

Other than lending guidelines, there may be other reasons to limit rentals, even though it will take a while for enough turnover in your membership for the limit to have any significant impact on rentals. Your community should discuss this and determine if a limit is right for your association.

Thanks,
Kelly

Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.