My Mortgage lender warned me of this last year. Told me the requirements for townhomes and condo's were getting pretty stiff. Alot of them went into foreclosure and are considered high risk investments now... Banks are not lending on them unless the reserve money is there and 20% down the equity must also prove to be there going by last recorded sale. I paid 144k for mine last recorded sale was 62k I could not sell mine if I wanted too!
Fannie Mae, Freddie Mac and FHA all require that 10% of annual budget be for reserves BUT they will consider a reserve study if this requirement is not met and if reserve study shows that reserves are well funded. Fannie, Freddie and FHA are not only folks who give or insure loans but they do most of them so local lenders who portfolio loans are a possibility.
I would push assoication to revise budget to provide for 10% reserve requirement to make unit marketable.
It is difficult to find lenders who will do loans for condos unless the LTV ratios are low, buyer credit scores are high and the complex has had recent comps that are in line with sale prices. Add to that the rules for federal programs and little items like HOA reserves will kill many otherwise "do-able" deals.
The banks don't want to get stuck, so they are looking for ways not to agree to any loan that isn't skewed heavily in their favor.
Good Luck getting your unit sold. Its tough out there even for investors who have good credit and nice down payments to get loans these days. We have seen many condo projects where loans are just flat out not an option.
Maybe try to sell it yourself under a "contract for deed" basis or other private arrangement.
What is the official source for finding out requirements in this area? I'm sure they are different state by state, and we are in Iowa. I know of no state requirements! Where does our Board go to learn more about this, and what the minimums are for a reserve fund? We have 78 free-standing townhomes, no common walls, in our development. Are these kind of townhomes held to a different standard?
The Fannie Mae and Freddie Mac requirement for reserves are in their selling guides which are avaialble on line but are about 1,200 pages each. FHA reserve requirements are set forth in FHA Mortgagee Letter 2009-46B. Unless these are detached condominium units, the reserve requirement applies to all condominiums. You would have to check your own state condominium act to see if it provides for reserves. Keep in mind associations don't have to abide by Fannie, Freddie or FHA gudielines and requirements but they should if they want financing of units form these entities.
For FHA approval, consider hiring a professional who knows how to get it done. Consider such experts aswww.getfhaapproval.com
As Stephen indicated, doing it by yourself can be daunting based on the size of the regulations.
Side note: most condos require 15%-40% of their budget going to Reserve contributions to be in the "adequate" range. If your association is contributing under 10% of the total budget towards Reserves, my first guess as a Reserve Study professional is that your association is grossly under-reserving, not that the FHA's requirements are burdensome.
The FHA requirements do not vary state by state -- they are Federal laws!
You can go to this website to view and download the current requirements:
If you live in an upscale area where most home buyers secure conventional mortgages then you may not need to worry about qualifying buyers for FHA mortgages. However, in this unstable market it may be wise to have all available financing possibilities for buyers.
The FHA requirements are a moving target--they are still considering changes. Fannie Mae and Freddie Mac are looking more carefully at underwriting--as they should. The environment for financing condominiums--both new construction and resales--will be volatile for the foreseeable future. Thus, your condominium association should do everything possible to fit within and comply with all agency guidelines. Even then, your association will have to apply for FHA approval itself or find a lender to underwrite the project for FHA approval.
Questions: Are the FHA approval letter requirements part of an admnistrative law (or other law)? If so, where can the law be found?
Next question, I have been told that under the HUD/FHA guidelines/rules that the FHA approval letter application must be renewed every two years by condominium associations?
Next question: I live in a free-standing (or detached) condominium, is the FHA approval letter requirements different for this type of condominium?
Great information on the reserve funds and the percentages each association should have in reserve (15-40%) as our condo association (only 5 members) does not currently have a reserve fund.
I hope my question is relevant,and it is ok to ask it here.... if not, I apologize, and I would like to know where to go to secure the information.
We have a condo association of five units. One member in our association deducts (is paid) $100 each month to provide the landscaping services for the association; she refuses to bill the association for 'services rendered.' I might too if I had a gig like this---as we live in New England and she is paid $1200/year and she hasn't mowed the lawn all summer nor does she mow it in the winter!!!
Is this legal? If we were audited, I am sure this wouldn't be acceptable. Also, we have ZERO in reserve....I think she ought to be paid to mow the lawn/landscape and her $100 should be going into our treasury for bills to be paid. IF she wishes to continue as our landscaper, she should be paid per job.
Thanks for any and all information I could bring to our September condo association meeting for back up!
Well, I wouldn't say it's illegal if there isn't a state law addressing this issue nor anything in your CCRs. However, if this member has been hired to perform a service for the HOA she should not be permitted to deduct her "salary" from her assessment. I'll bet if she was required to pay her assessment in full, and only paid for work performed she would be performing the service required in the contract.
A Question on this because it is very ambiguous. Is it 10% of the budget must be allocated to reserves, or that there must be an allocation from the budget to replace capital and deferred maintenance into an account that is at least 10% of the annual budget.
These are two different things.
We currently have over 15% of our annual budget in reserves with no long-term unfunded projects, though our addition to reserves this year is only about 5% of the budget, though this will give us 20% in reserves.
As I also read it, there is no statement for how much must be MAINTAINED in reserves, so to meet the requirement, one could empty out the reserves at the end of one year back into their checking, and budget and transfer into reserves at the beginning of the next fiscal year.
I really dislike the use of "Replacement reserves" because, say for example, last year we had NO EXPENDITURES out of our reserve account, so how can we have "Replacement" reserves when there were no reserves spent.
My reading of the wording:
"Provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget"
is that the 10% of the budget is a threshold description on the reserve account (i.e. the account must be 10% or more of the annual operating expenses) and not that 10% of the budget must go to reserves.
Maybe I am missing something, but nowhere else do I see a level set for maintaining reserves and under the interpretation that you only have to budget and place 10% annually, you could in fact have an empty account most of the year and still be in compliance, whereas under my interpretation not only does the word "Replacement" then make sense (i.e. as funds are spent, replacement funds need to be budgeted) but as well it sets a threshold on the account.
My mortgage application for buying a condo in Edison, NJ 08817 was also declined by BofA (via Fannie Mae) indicating that the project reserve is at 7.03% against required 10%.
But this project is under FHA approved list till 2011. Not sure how this is possible?
Also I am not sure if the Bank read the reserve % right from the HOA budget? It has a line 'Capital Reserve' with amount 100K which 7.03% of annual budget.
Is this the amount they would add to the capital reserve this year or that is the total reserve?
Any help would be greatly appreciated.
Thanks - Ashok
Condo Assn 10% rule....for reserves
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The rule seems to be still very vague and I have seen no concrete answer as to the 10%. Does the rule indicate that 10% of the budget needs to be set aside for reserves or that the reserves must be 10% of the budget. These are two VERY different things. If my budget is $100K and I have $11K in reserve, do I need to have 10% in my current budget (i.e. increase reserves by 10% annually) to match, or can all monies be spent as current as long as 10% remains in reserves.
Does it mean that I have to have 10% of every budget earmarked for reserves, so it does not matter that at the start of the year there is $500 in reserves as long as I show that there is $10,000 flagged on the current budget earmarked as reserves
Or is it something COMPLETELY useless, like I have to have 10% maintained in reserves, and 10% earmarked in the budget which is a waste because that 10% can basically be a revolving door and simply put in to reserve one day, back into checking the next and I have maintained 10% in reserve and 10% budgeted annually for reserve...
Or is it something completely asinine such as every year you have to budget and increase reserves by 10% annual, so at the end of 10 years, I have $100K sitting in the reserve fund, and if I have to do a major project for $50K, I still have to assess?
Just another case of an incredibly poorly written language by lawyers that is intentionally ambiguous.
We just went through the whole process of selling one condo, and buying another. We found that if a buyer will place 25% down, and have good credit, the lender can request a "limited review" which can somewhat bypass the reserve issue, as lonf as the building is in good shape, both financially, and structurally. Good luck.
I camne across this issue of the condo association (6 units) not having 10% in reserves when buying my condo in 12/10. I ended up paying 6 months of condo fees up front a few days before closing and everything went smoothly. Now another owner is trying to sell his place and is coming across the same issue. We're going to address this issue at our next condo meeting to make sure we have 10% in reserves going forward.
Problem I have been seeing is that since this has shifted and now more of a Freddie Mac / Fannie Mae and not just FHA guideline, that some underwriters still do not understand the issue, and many think that it is a BUDGET amount (i.e. how much has to be ADDED every year) versus a Floor Maintenance level on the Reserve Account. I just ran into this last week and took forever to get resolved since we only had 5% of our budget going to reserves, but the reserve account was already over 10%, and I basically had to explain that we had just done two large capital projects in the last two months, have ALWAYS maintained 10% floor over the last 7+ years, and then showed that our fiscal year end target was 15% and 2013 target of 25% as well as showed that over the last 7 years, we have spent 250% of our operating budget on capital improvements and provided dates, amounts and projects.
Long and short, even if you plan, are fiscally sound, you still have to often "educate" the underwriters because most still interpret 10% of operating budget as amount to be ADDED to the reserve fun every year. I pretty much am reworking the Budget Documents for next year so the that top section is a BOLDED SUMMARY that states the Operating Budget amount, the Reserve Balance, the Percentage of OB, Planned contributions, Planned Projects, and Projected Ending reserve.
This whole think is nuts. Just had a meeting and an owner throw this 10% crap at me. Our budget is $90,000 and our reserve fund is $260,000 due to a sale of property, our deposits to the fund are currently almost nothing. Does ti make sense to increase assessments by 10% to meet this nonsense rule, if the banks don't feel our reserve fund is high enough too bad.
Agree with serpi5 that the FHA 10% rule makes n o sense, but for a different reason. Why would it be aqcceptable to dedicate 10% of a budget to reserves and not care a whit about the amount of reserves already in existence. serpi5 talks about a situation where 10% would be required even though the association has a huge amount already in reserves. The opposite could also be true, budget 10% but have very little in reserves yet need a reserve expenditure. For example, budget 10% of $100,000 or $10,000 but have only $5,000 in reserves now yet, have a need to re-roof or repave which would cost WAY more than the $15,000 that would end up in the reserves. Looks like the FHA woulnd't care even though this kind of situation would result in a deterioration of the association property or more likely a dreaded special assessment. When I first came to my association they were budgeting $3,000 per year for reserves yet planning to repaint all buildings every 5 or 6 years at a cost of $25,000 each time. Huh? In addition, they used reserve money to cover over-budget issues and had no reserve plan. Now they have a 30 year plan and are budgeting $8,500 per year for reserves. A new contingency account was established to cover overbudget situations in the operating account. They have four separate accounts. An operating account. A contingency account to cover over-budget issues, a reserve cash account to hold reserve funds expected to be needed in the current year with the rest of reserves in CDs (of course rate stink but that's another subject).
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I live in a condo complex with 8 buildings 24 total units. Our annual budget is about $90,000. We have about $200,000 in our reserve fund with $2000 being added yearly. Do these numbers satisfy the FHA etc 10% line item in budget requirements.
You do not satisfy the FHA 10% of annual budget requirement requirement, you would need tio set aside $9,000 (this is what is stupid about the FHA requirement; you have plenty in reserves but they insist on the 10%. But.... WOW! .... 24 units with a $90K budget and $200K in reserves? How did you ever do that? My place has a $34K budget, $34K in reserves for 16 units. And the folks afre complaining about the fees.