FHA Condo Approvals – Financial Requirements
After posting my article on Investor Ownership Requirements for FHA Condominium Project Approval, I received inquiries to post about the financial/budgetary requirements for FHA Approval.
I wrote and posted an article about a very common issue that pertains to budgets. However, I haven’t posted an article that speaks directly about FHA’s financial requirements for condominium projects.
This is the area of the project approval that can be the most subjective. All of the pieces lend themselves to the determination of a financially sound project. But what exactly does it take to be “financially sound”? This is where the subjectivity enters and, although it is fairly stable, it does vary from one reviewer to the next.
The required financial documents to be supplied initially to FHA are only three items:
1. Current Approved Budget,
2. Last fiscal year’s Income/Expense Statement, and
3. Balance Sheet dated within 90 days.
Simple right? Well, yes and no. Let’s take them individually…
Current Approved Budget
The current fiscal year’s budget must be supplied. It must say on it “Approved”, “Adopted” or similar language. Often, when budgets are being developed, the title includes “Proposed” and it never gets updated when it is passed. This will result in the project getting Rejected.
The budget must contain a line item that delegates a contribution to the reserve account equal or greater to 10% of the annual budget. It is NOT sufficient for the budget to not contain this line item and for the HOA to simply contribute any excess income to the reserve account.
Other notables with the budget include not transferring funds from the reserve account into the operating account (typically noted as “Income”) and that sufficient funds are budgeted for payment of insurance and maintenance of all amenities and features of the condominium.
Income/Expense Statement from the Previous Fiscal Year
The previous fiscal year’s Income/Expense statement will be reviewed in a similar manner as the budget. The project reviewer will look for the same items as mentioned in the previous paragraphs.
In addition, a financial loss during that year will need to be explained and documentation will need to be provided to illustrate that this was an anomaly and doesn’t occur each and every year.
The Condominium Project Approval and Processing Guide states that the Balance Sheet must be dated no earlier than 90 days prior to submission. In my experience, this should really say “90 days prior to review”. It typically takes FHA 3 weeks (although it says to allow up to 30 days) for the submission package to be reviewed. I recommend submitting a balance sheet dated within 30 days of submission.
The Balance Sheet provides a “snapshot” of the financial health of the project. It is also reviewed to verify that the HOA is maintaining an “adequate” reserve account balance. FHA says that the reserve account balance should never drop below 10% of the budget. However, this 10% amount may not be enough if the project is older and could be in need of major capital improvement projects in the near future.
Other Financial Documents
In the case that the above three documents cause the reviewer to question the financial health of the project, he/she can request the following additional documents:
Special Assessment documentation would need to be provided if there is a pending or upcoming special assessment project.
Loan documentation must be provided if the HOA has an outstanding loan.
Reserve account statements may be requested if the amounts listed on the Balance Sheet are questioned.
Two additional years of Income/Expense statements may be requested if the previous fiscal year’s statement shows a loss or a reduced or no contribution to the reserve account.
Audited financial statement from a CPA may be requested if the previous years’ Income/Expense statements point to financial distress.
A reserve study may be requested if the overall financial health of the project is in question.
Because of the subjectivity, a project reviewer may or may not ask for these or other items to help him/her to gain a clear picture of the financial health of the project.
The reserve study is sort of a last ditch effort for the project to get approved. If all of the financial documents from above have been provided and the reviewer still does not feel that the financial status is sufficient, a reserve study will be requested.
Image courtesy of renjith krishnan/freedigitalphotos.net
The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA. We have assisted nearly 200 condominiums and we can help your association.
ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.
Please contact us with any questions regarding FHA or VA condominium project approvals. You can email me at firstname.lastname@example.org or call me at 404-433-4565. I will be happy to answer any of your questions.
FHA/VA Condo Approval Specialist
404-433-4565 Cell Phone
860-644-3772 Fax Phone
Check out our article in Common Interest magazine on page 19!