Financing a condo has always been a unique process. VA condo financing (just like Conventional, FHA, JUMBO condo financing) has an added layer of underwriting. Lurking in the added layer is a rare but deal breaking circumstance that can restrict the veteran’s ability to finance a condo with a VA home loan.
Approving the Condo Project is Nothing New
Condo financing is unique based on the need for the entire HOA/condo project to be reviewed. However, the metrics and measures vary from loan type to loan type. For example, Conventional home loans require lenders apply 1 of 2 types of reviews to a condo project (“full” or “limited”). FHA maintains a “pre-approved condo list” lenders refer to as an integral part of the FHA condo approval process.
VA (much like FHA) manages a list of currently approved condo projects. While FHA’s pre-approved condo list is more of a pass/fail system, VA’s list goes deeper. Condo projects may be listed as “approved with conditions” or “approved without conditions” on VA’s pre-approved condo list. So far, pretty straight forward and possibly nothing you have not heard of before. Keep reading, this is where it gets interesting.
The VA Condo Financing Hurdle
In order to land on the VA’s approved condo list, a condo project must pass a thorough review. Lenders scrutinize various attributes and documents from the HOA/Condo project. For example, a mortgage lender will review:
- Condo Project CC & R’s
- Articles of Incorporation
- Plat Map
- Site Plan
- Most Recent Budget
- Meeting Minutes (from recent 2 meetings)
- …and the list goes on and on
Hundreds upon hundreds of pages are combed through when a condo project is reviewed for VA financing eligibility.
VA and Rent Restriction Clauses on Condos
VA does not allow a “rent restriction clause” in a condo project. Rent restriction clauses can be snuggled deep down in the condo project’s bylaws. The hard to find rent restriction clause restricts how a condo owner in the project may rent their condo.
For example, a rent restriction clause may say no more than “x” condos can be rented at once in the project. Owners cannnot rent their unit out once “x” number is reached. Condo owners in that project cannot rent their condo out until the number of rentals drops below “x”. Some exceptions may exist.
VA Needs Veterans to be Free to Rent their Condo
VA’s mission is to protect our veterans. VA will not allow a veteran to finance a condo in the project using a VA home loan when a rent restriction clause is present. Some exceptions may exist.
VA disallows rent restriction clauses based on a veteran’s potential deployment. When a veteran is deployed, what happens to their condo? The VA requires the vet be allowed to rent their condo out while they are off serving. In fact, VA believes rent restriction clauses place VA Financed-condo owners into potential financial hardship when orders take them away from home. Therefore, VA says “no rent restrictions” (exceptions may exist).
VA Protects VA Condo Owners
Technically VA only cares about rent restriction clauses limiting VA financed homeowners. Veterans can ask the HOA to amend the clause allowing VA financed homeowners to rent. This is acceptable even when the rent restriction is still in place for all no VA homeowners.
Why It’s a Challenge: HOA vs. VA Focus
An HOA’s focus and VA’s focus are different. HOA’s like to limit the number of rental condos in a project. This protects the marketability of the project. Many loan programs require that there only be a limited number of rental condos in a project to be eligible for financing. In addition, some HOA’s use rent restrictions to prevent monopolistic ownership.
VA on the other hand focuses on protecting the veteran during a possible deployment.
By Jeremy House