If you serve on a community association board or manage a community association you know that October means budget season. This seemingly straightforward task of lining up revenue and expenses can be complicated by two factors.
First, expenses keep going up and second, residents are resistant to assessment increases. To complicate matters in the post Great Recession world, federal mortgage regulations direct lenders to look at the financial health of the association when making lending decisions. Thus, budgets are becoming more than an exercise in estimating annual expenses; they are becoming a tool to measure the financial health of the community association. But associations that pay attention to budgeting fundamentals will find themselves well positioned to deal with these changing requirements.
Following the Great Recession, federal mortgage regulations began placing new emphasis on association finances. This means that lenders not only look at a borrower’s ability to repay the mortgage but also the financial health of an association. In short this means the financial health of your community could determine the availability of mortgages for all units in the association.
Regulatory changes are driving this evolution in the market. First, for Condominiums the Federal Housing Administration (FHA) is the de facto standard setter for condominium lending, even for loans that don’t originate from FHA. FHA standards set a high bar for condominium association finances. FHA requires that an association budget be adequate to cover ongoing maintenance, imposes insurance requirements, mandates that 10 percent of the budget be set aside for reserves and sets strict limits on assessment delinquencies.
FHA may also disqualify loans to condominium associations that impose special assessments. Failure to meet these requirements means that no buyer or seller in the entire association will qualify for FHA financing. Many private lenders are also adopting the FHA lending standards for non-FHA backed mortgages. Thus condo associations need to pay close attention to these factors when developing their annual budget.
Back in 2013, we noted that larger shifts in federal mortgage rules could have a broad impact on all mortgages. Regulators, eager to avoid another historic housing collapse, worked to expand the data that lenders examine when making loan decisions. The ability to pay not just principle and interest, but also other mandatory fees like association assessments were added to the analytical mix. Thus associations which have a focus on budget fundamentals with funding set aside for reserves, will ensure that homes in their community are marketable to a wide range of buyers.
It is more important than ever that the budget be a realistic assessment of the associations anticipated expenses. In the past, sloppy budgets merely meant hitting residents up with a special assessment or delaying maintenance or reserve deposits. Now, inaccurate budgets could mean the denial of mortgages for potential buyers in your community. However, while the stakes are becoming much higher, the solution is not complicated.
Associations need to ensure their budgets are a realistic assessment of the expenses anticipated in the year ahead and focus on the fundamentals that are critical to the community which include:
- Review your association reserve study, allocation and funding levels
- Review of insurance coverage and available funding to cover deductibles
- Incorporate funding for community projects or replacement programs
- Make reasonable allocation for delinquent assessments
- Ensure that funding is adequate to maintain association amenities and infrastructure
Associations that focus on the fundamentals will successfully navigate the evolving mortgage rules and will ensure the marketability of units in their community. Associations that cut corners or ignore the basics may find themselves out in the cold.
ABOUT THE AUTHOR
Andrew S. Fortin is the Senior Vice President of External Affairs for Associa. He works to engage government officials, the media and clients in building stronger community associations and help shape laws that support vibrant community associations.