Does an Outstanding Loan Prevent an FHA Condo Approval?
Last month, I was invited to attend a roundtable session in Washington D.C. as an industry expert for FHA Condo Approvals. Prior to going, I inquired with my business associates and referral partners as what questions they would like to have answers about FHA approvals.
One of the questions that I received was from an attorney who works with condominium associations. He asked how FHA views loans acquired by associations and if they have a negative impact on the approval of the condominium project.
The quick answer to that question is generally an outstanding loan balance to the association is not a detriment to the project’s approval.
However, when FHA analyzes the project’s financial picture, it takes all aspects into account. Specifically, with loans, FHA reviewers will look for answers to the following questions:
1. What was the purpose of the loan? If the loan was to fund large capital improvement projects, such as roofing, siding or paving, this is not typically looked at in a negative light. If the loan was to cover shortfalls in an operating budget or to fund a capital reserve account, these are viewed as questionable practices.
2. Has the association been budgeting for capital repairs? Funding of a capital reserve account for future significant expenses is required by FHA (and Fannie Mae, Freddie Mac and the VA). If the association has been properly funding a reserve account, then an outstanding loan should be ok.
3. How is the association using reserve funds? If the association has been funding a reserve account, how is it using those funds? If it is using them to pay operating expenses, this is viewed negatively. However, if the association has made a conscious decision to save those funds for a catastrophic event and is using a loan to fund capital projects, this is ok with FHA.
4. Has the loan been paid according to the terms? Although evidence of satisfactory loan payment history has been required, FHA began to pay closer attention to this during 2013. It now requires a printout of the payment history from the lender demonstrating that the loan has been paid on time since its inception.
Thus, generally, the responsible use of loans by associations should not prevent them from obtaining FHA condominium project approval. Excessive use of loans and special assessments by associations could show mismanagement of finances and a lack of financial aptitude by the association which could lead to a request for a reserve study or outright denial of approval.
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!