By: Tracy N. Danner-Bond
One out of every 11 citizens in Michigan is a veteran and may receive benefits from the U.S. Department of Veterans Affairs (VA) VA Certification. The VA may help service-members, veterans, and certain qualified surviving spouses of service-members and veterans become homeowners through a home loan guarantee benefit whereby the VA guarantees a portion of the loan. While this benefit is virtually automatic for anyone who has served in the military (including reservists and Guard members), loan approval still requires the buyer to be approved under lender criteria. Generally speaking, this means that the buyer must have the same minimum credit score as a buyer under an FHA loan program.
The goal of the VA loan program is to help protect the interests of veterans and the Government by ensuring that all properties located in a common interest community (such as a condominium project) meet VA regulatory requirements. Meeting this goal as efficiently and cost effectively as possible serves the best interests of all program participants involved. To that end, the VA has promulgated regulations and requirements for certification of condominium communities.
VA Certification requirements for condominium communities are very similar to FHA Certification requirements, but with several important exceptions. As with FHA Certification, VA Certification requires that copies of all association documents, including management agreements and budgets, be submitted to the VA for review. Unlike FHA, however, the VA requires inclusion of an attorney opinion letter addressing compliance of the condominium association documents with Federal Regulations 38 CFR 36.4356 through 36.4360a(g). These regulations involve senior lien status for VA mortgages over association concerns, acceptable ownership arrangements, and title requirements.
One of the most notable differences between VA loans and other loan programs is their foreclosure rate. VA loans have the lowest foreclosure rate of any home loans written over the last five years. The rate of foreclosure on VA loans is a mere 1.98%, as compared to the higher foreclosure rates on prime loans (2.47%) and FHA loans (3.80%).
Condominium association Boards of Directors should be aware of two types of clauses in governing documents which can render associations ineligible for VA Certification: rights of first refusal and rental restrictions. A right of first refusal is a provision which gives the condominium association the option to purchase any unit offered for sale in the community before it can be sold to an outside buyer. These provisions are disfavored because they could allow the association to deny a transaction based on the potential purchaser.
The VA will not approve any condominium project whose documents contain a right of first refusal. It is worth noting that the FHA Certification rules differ somewhat from the VA Certification requirements on this issue. Rights of first refusal may not disqualify an association from FHA certification as long as the language specifically provides that the association may only deny a proposed sale for the purpose of allowing the association itself to purchase the unit. If a right of first refusal allows the Board to accept or reject purchase contracts for any other reason, then the provision will disqualify the association from being eligible for FHA certification.
If a unit cannot be rented because of rental restrictions contained in the association’s governing documents, then the VA will not approve the community as a whole under the theory that a member/veteran could be at financial risk due to his or her inability to rent the unit on short notice, such as when the member becomes suddenly deployed or receives transfer orders. Even if leasing is not prohibited in the condominium documents, any provision which gives the association’s Board the right to review and approve the form of written lease that an owner wishes to use for a lease transaction will render the association ineligible for VA certification.
With that said, this does not mean that all rental restrictions must be lifted from the condominium association documents completely. It is possible for the association to amend its documents to incorporate an exceptions clause specifically stating that military orders/deployment create special circumstances under which the Board may allow the rental of the unit. These types of “saving” amendments could also specify that the rental restrictions do not apply to any unit which is subject to a VA mortgage (or which the VA owns as a result of a mortgage foreclosure sale).
More than 707,000 loans were guaranteed by the VA in 2016, and this number is expected to grow exponentially over the next five years. VA Certification for condominium associations broadens the potential buyer pool, thereby increasing marketability and property value of the units within the community. VA Certification does not expire and is only withdrawn when violations of VA requirements occur. Violations could include refusal to allow rental of a service-member’s unit when proper circumstances exist, changes to bylaws to include a right of first refusal clause, declaration of bankruptcy by the condominium association, and new approval of mixed-use residential/business units within the community (the foregoing list is not all-inclusive). It is also important to note that violations of VA requirements can only occur as a result of actions taken by the association’s Board – individual co-owners within the community cannot cause the association to violate the VA requirements.
The process of VA Certification is time-consuming and does require a concerted effort between board members, property managers, and the association attorney to gather the requisite documentation and present it in proper manner to the VA for approval. Nevertheless, association boards should at least consider obtaining VA Certification in light of the benefits that it can provide and the significant number of veterans and service-members currently buying condominium units.
Special thanks to Stacia Miller for her contributions to this blog post. Stacia, a recent law school graduate, joined the firm in 2016 as a law clerk. Stacia is herself a veteran and gives her time to many volunteer causes for the benefit of veterans.
Tracy N. Danner-Bond is a partner with the firm. Prior to joining the firm in 2004, she practiced estate planning, probate, and tax law on Ann Arbor. In addition to continuing her practice in estate planning law, Tracy has extensive experience in community association law. Her particular expertise includes FHA certification, document amendments, collection matters, and Bylaw violations.