May 24, 2018

Vimeo Channel YouTube Channel

What Does “Legal Restrictions On Conveyance” Mean?

What does "legal restrictions on conveyance" mean?

What does “legal restrictions on conveyance” mean? It’s a question some borrowers won’t need to ask, but it is one that can and often does affect some transactions-especially where condo loans are concerned.

FHA loan rules require the property that is purchased with an FHA loan to be “freely assumable”. That basically means there can be no limits imposed on the owner of the property on selling or otherwise disposing of the property. The lender is required to make sure there are no legal restrictions on the borrower in this way.

What kind of restrictions do we mean here? One type is the “right of first refusal” found in some condo owner association agreements. Depending on the wording of such agreements, the owner may be required to allow the condo association to have a say in when or to whom the condo units in that particular project are sold to.

Such clauses are not permitted for FHA loans.

There are other restrictions that may affect the ability to get an FHA loan approved, as described in HUD 4000.1. Here’s one example:

“A Property that contains leased equipment, or operates with a leased energy system or Power Purchase Agreement (PPA), may be eligible for FHA-insured financing but only when such agreements are free of restrictions that prevent the Borrower from freely transferring the Property. Such agreements are acceptable, provided they do not cause a conveyance (ownership transfer) of the insured Property by the Borrower to:

-be void, or voidable by a third party;
-be the basis of contractual liability of the Borrower (including rights of first refusal, pre-emptive rights or options related to a Borrower’s efforts to convey);
-terminate or be subject to termination all or part of the interest held by the Borrower;
-be subject to the consent of a third party;
-be subject to limits on the amount of sales proceeds a Borrower can retain (e.g., due to a lien, “due on sale” clause, etc.);
-be grounds for accelerating the insured Mortgage; or
-be grounds for increasing the interest rate of the insured Mortgage.”

As you can see, there are a variety of “deal breakers” listed above. HUD 4000.1 adds to this, “Legal restrictions on conveyance of Real Property (i.e., the house) that could require the consent of a third party (e.g., energy provider, system owner, etc.), include but are not limited to, credit approval of a new purchaser before the seller can convey the Real Property, unless such provisions may be terminated at the option of, and with no cost to, the owner.”

FHA loan rules do not allow the borrower to get tied up in arrangements that restrict the ability to sell or retain the property as listed above.

Bruce Reichstein - Staff Writer

By Bruce Reichstein

September 8, 2017

Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.

Connect with Bruce:


Browse by date:

About was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

5850 San Felipe Suite #500, Houston, TX 77057 281-398-6111. is privately funded and is not a government agency.

Share This