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WASHINGTON – July 19,
2013 – A Federal Housing Administration (FHA) notice released today says that
it’s seeing an increase in the number of condominium project approval
applications that contain mortgagee exception clauses or have language that
allows a unit to be rented for less than 30 days or used for hotel purposes.
The FHA uses a specific definition for transient rentals that make a project ineligible for FHA funds. In addition to a ban on rentals of less than 30 days, it looks at the way the unit it is used, and whether or not renters receive amenities generally considered ones that come with a hotel rather than a condo. Those “customary hotel services” could include room service, maid service, furnishing and laundering of linen, bellboy service, etc.
Until today’s announcement, condominium legal governing documents (Covenants, Conditions and Restrictions, or CC&Rs) had to be amended to remove unacceptable language to make the project eligible for FHA approval. However, there is now another option:
Condo association: If it won’t amend the CC&R, the association board may provide an executed written statement on letterhead that confirms no units in the project are currently rented for less than 30 days, and no lessor provides services normally associated with a hotel.
Lender: If the association decides not to amend the CC&R but submits a statement, an originating lender must also provide an executed statement on letterhead that affirms it will not use the unit for a transient rental if it one day takes the unit back through foreclosure or other actions.
Borrower(s): All borrowers must also execute form HUD-92561, Borrower’s Contract with Respect to Hotel and Transient Use of Property, which applies to all condominium loans using FHA insured financing.
The FHA uses a specific definition for transient rentals that make a project ineligible for FHA funds. In addition to a ban on rentals of less than 30 days, it looks at the way the unit it is used, and whether or not renters receive amenities generally considered ones that come with a hotel rather than a condo. Those “customary hotel services” could include room service, maid service, furnishing and laundering of linen, bellboy service, etc.
Until today’s announcement, condominium legal governing documents (Covenants, Conditions and Restrictions, or CC&Rs) had to be amended to remove unacceptable language to make the project eligible for FHA approval. However, there is now another option:
Condo association: If it won’t amend the CC&R, the association board may provide an executed written statement on letterhead that confirms no units in the project are currently rented for less than 30 days, and no lessor provides services normally associated with a hotel.
Lender: If the association decides not to amend the CC&R but submits a statement, an originating lender must also provide an executed statement on letterhead that affirms it will not use the unit for a transient rental if it one day takes the unit back through foreclosure or other actions.
Borrower(s): All borrowers must also execute form HUD-92561, Borrower’s Contract with Respect to Hotel and Transient Use of Property, which applies to all condominium loans using FHA insured financing.
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