When the Federal Housing Administration (FHA) is reviewing a condominium association's application for certification, there are several criteria that can trigger an immediate rejection. In our work with clients, a common issue we see arise is inadequately funding association reserves. Here are some tips to avoid this pitfall.
What are FHA requirements on reserve funding?
FHA’s role is to back mortgages it issues, so it makes sense that they would want to evaluate data to assess the risk of the loan. One area of concern is if the association is setting aside sufficient funds to replace common elements at the end of their useful life or make capital improvements to the property. For condominiums, such expenses are funded through reserves.
To obtain FHA approval, a condominium association must allocate at least 10% of its budget to provide funding for replacement reserves and capital expenditures. If the association budget does not reflect a 10% set aside for reserves, for example, if its reserves are fully funded, then it must also present a reserve study undertaken in the last 24 months.
Most rejections we see at Associa FHA Assist in this area occur when the budget does not reflect a 10% set aside for reserves. Making sure you budget is aligned with these requirements will help speed the approval process.
Why Associa FHA Assist?
FHA backed mortgages are an attractive form of financing, especially for condo buyers. Prior to any purchaser obtaining an FHA mortgage, the entire association must be approved by FHA. Once an application is completed, it can take up to 30 days to get FHA approval for your association. What that means is if your association waits until a unit owner has a buyer wanting to use FHA, the time frame for approval may result in a lost sale. The best way to help ensure your association is marketable to the broadest range of buyers is to get FHA approval. Approvals are good for two years. Natalie, Associa’s FHA assist lead can help! She can be reached at Nayers@associaonline.com.