Written By: Stacey Sprain
I had a great question come in yesterday that I thought would make a great topic for this week’s article. An originator asked- “How does HUD define a homeowner association’s “right of first refusal” regarding condominium project review for approval or for spot loan review for approval? What does that term mean?”
The reason this question is an important one regarding FHA financing is because it is a HUD requirement that the subject condominium association not maintain a right of first refusal within the association’s decs and bylaws.
A right of first refusal places a restriction on conveyance of the seller’s title and in short, allows the HOA the right to buy a unit at the price and terms the owner might negotiate with an eligible buyer. Often the association elects to include a right of first refusal clause in their decs and bylaws because they do not want to allow one of the unit owners to sell at a discounted sales price because they fear that their own market values would be adversely affected.
HUD, however, views a right of first refusal as having the potential to negatively impact the marketability of the property because potential buyers may not be so thrilled about proposing an offer only for it to possibly be refused because of the HOA’s right to override the offer and thus purchase the property themselves. HUD views the right of first refusal as a restriction and thus, an added risk for the property itself.
HUD wants to make sure that the unit owner has the right to sell, transfer, or otherwise convey his/her condominium unit to an eligible buyer without the association having the right to first review and approve or refuse the buyer.
I realize that right now out there, this simple little requirement is cause for a LOT of loan denials for units in condominium projects that indeed do maintain a right of first refusal among their HOAs. Unfortunately, there is not a lot that can be done about it aside from the association electing to record an amendment to their decs and bylaws removing the right of first refusal.
I often see and hear the question or proposal that the HOA will simply waive the right of first refusal so that a particular unit can meet spot loan requirements and be approved. Such is not allowed by HUD, however. HUD expects the association’s decs and bylaws to clearly state that a unit owner may transfer his or her unit without regard to restrictions of any kind. They want to assure that any right of first refusal in the condo project’s documents do not have the potential to impact the rights of a mortgagee (the lender) or its assignee.
For more information on FHA spot loan condominium requirements, refer to Mortgagee Letter 1996-41 and the spot loan checklist included within.
About The Author
Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at: email@example.com.