FHA Condo Approval Specialist: FHA Condo Approvals – What About Pending Litigation?

FHA Condo Approvals – What About Pending Litigation?

FHA Condo Approvals – What About Pending Litigation?

fha condo approvalI have often heard that if a condominium association is currently involved in litigation, it results in an automatic Rejection for an FHA Condo Approval.  In fact, I read an article earlier this week that mentioned this.

It is simply not true.

More than half of the condominium associations whom we’ve assisted to obtain their FHA approvals have been involved in litigation in some form.  FHA does want to know about the pending litigation so that it can make a determination regarding the potential risk to the association.

FHA is interested in actions that involve the association as a defendant, not as a plaintiff.  This means that no information need be provided to FHA regarding suits where the association has taken legal action against a unit owner for non-payment of common charges.  The exception to this is if the association is suing the builder for structural defects.  FHA would require information pertaining to this lawsuit as it points to a much larger issue and potential risk to FHA.

FHA is also not concerned about foreclosure actions against unit owners where the association is also named as a defendant.

Aside from foreclosure actions, the most common are suits regarding liability insurance, aka “slip and fall” suits.  Rarely does this adversely affect a condominium project’s ability to obtain an FHA condo approval.  This is because slip-and-fall suits are typically covered by the association’s liability insurance.  Only in cases where the claim is greater than the insurance coverage might the association suffer damages.

According to HUD’s Philadelphia Homeownership Center, as of September 2013, only one condominium association was rejected on the basis of a slip-and-fall suit.  It involved a professional dancer who suffered a career-ending injury and was suing the association for something like $10 million.  This is far in excess of the liability coverage and FHA would not consider and approval of the condominium until the conclusion of the suit and the damages were known.

About 30% of the associations whom we have assisted have been involved in slip-and-fall cases and all have obtained an FHA condo approval.

Some actions against associations involve suits over broken agreements and contracts.  An example would be if an association fires a landscaper and the landscaper sues for the remainder of the funds owed to him/her as per the contract.  In cases like these, FHA determines if the association has sufficient funds to cover the full amount of monetary damages sought AND still have enough money remaining to meet the reserve requirements.

fha condo approvalSometimes the actions are only to seek injunctions but not specific monetary compensation.

I heard an example of this recently.  After unsuccessful attempts of a unit owner to convince the condominium Board of Directors to move a light pole and dumpster and to ban kids from playing in a common area, he presented the association with legal action to get his way.  He is not seeking monetary compensation and, if he wins, it may cost the association a small sum of money to move a light pole.

Another example is a defamation lawsuit of a unit owner against the association.  I won’t get into the details of the case but the unit owner has gone on record that he is not seeking a monetary reward (which is very difficult to obtain in such cases anyways).

In this case, an attorney opinion letter from the association’s attorney will play a major role in FHA’s determination of the potential risk to the association, and the risk to FHA should it choose to approve the project.

Gavel image courtesy of Salvatore Vuono/freedigitalphotos.net

Light post image courtesy of artur84/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 askeric@readysetloan.com 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

eric.boucher@readysetloan.com
ready set loan condo team

 

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 Check out our article in Common Interest magazine on page 19!

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Comment balloon 22 commentsReadySetLoan Condo Approval Team • June 27 2014 11:06AM

Comments

Good to know! I've often wondered about that.  Now I know which form of litigation will fair better.  Great post.  Suggested!

Posted by Jan Green, HomeSmart Elite Group, REALTOR®, EcoBroker, GREEN (Value Added Service, 602-620-2699) over 4 years ago

Good morning Eric. Pending litigation can definitely be a challenge when it comes to obtaining a mortgage. Not always an easy decision for a lender, as they may have difficulty selling the mortgage in the secondary market.

Make it a great weekend!

Posted by Joe Petrowsky, Your Mortgage Consultant for Life (Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709) over 4 years ago

Hi Eric.  I can't believe FHA takes such a common sense approach to litigation.

Posted by Conrad Allen, Webster, Ma, Realtor (Re/Max Professional Associates) over 4 years ago

Thank you Jan.  I'm pleased that the information was helpful!

I never thought of it from that angle, Joe.  Only from FHA's view.

Believe it or not Conrad, they do take a common sense approach to most criteria from what I have seen.  (Lifelong MI not being one of them!)

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) over 4 years ago

So the dancer slipped and fell, which resulted in a slip-and-fall lawsuit???

Great post, by the way.

Posted by Rachel Khoury, Your Wingwoman for Colorado Mortgages (Tailwinds Mortgage) over 4 years ago

That's useful information to know. Every day is a new learning experience on this platform

Posted by Ed Silva, Central CT Real Estate Broker Serving all equally (RE/MAX Professionals, CT 203-206-0754 ) over 4 years ago

Eric even though the litigation is many times not a deal killer, it can be a real pain in the donkey when doing a loan.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 4 years ago

Thanks for the clarification.  There is a lot of misinformation out there.

Posted by Joan Whitebook, Consumer Focused Real Estate Services (BHG The Masiello Group) over 4 years ago

Any pending litigation with a condo association can often put a monkey wrench into a transaction.  

Posted by Myrl Jeffcoat, Greater Sacramento Real Estate Agent (GreatWest Realty) over 4 years ago

Exactly. And also, to using metaphor, complaining about the roadblock doesn't get you around it. a

Posted by Laura Cerrano, Certified Feng Shui Expert, Speaker & Researcher (Feng Shui Manhattan Long Island) over 4 years ago

Our HOA did a Settlement Agreement with our Master HOA. All homeowners (132) plaintiffs but only 19 signed in agreement to do the litigation (which cost insurance to our Master HOA apx. $200,000). Our homeowners are not allowed to see the agreement or the settlement amount! Only the two boards (members and spouses sued) and our Sub board and plaintiffs, total 19. I was told that the 19 got the money and gifted it back to the HOA. The Sub attorney wrote me a gag letter and said I was not allowed to ask any more questions to our management co. or our board! I attended the Master meeting, ask they re-do the secret agreement and be transparent with our (over 400 homeowners in both HOA's involved that know nothing!!) homeowners, they said they will talk about it together and decide. I was advised by their attny that I could get the info if I went to court or hired myself a lawyer. WHAT! You gotta be kidding, this was our homeowners money and they are allowed to do this????

Posted by Peggy Damato over 4 years ago

One more thing, the money did not leave a paper trail. Because the Master ins. co paid the sub attorney as well as the Master HOA showed having paid $30,000 directly also to the attorney. So he had the control over the money, he sent us what was left over, that was $34,000 and this shows on the books. But his fees do not, not does the paper trail show the money was transferred from the 19 plaintiffs to our HOA, so we do not really know how much they kept or gifted back, not fair, should be transparent don't you think?

Posted by Peggy Damato over 4 years ago

Thank you for the information. I had a situation where the condo was suing the builder for structural problems and fha did not like it and wanted a structural engineer to write a report that there were no structural defects.

Posted by Gita Bantwal, REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel (RE/MAX Centre Realtors) over 4 years ago

HI Rachel - yes, you would think that a professional dancer would have better balance.

Thank you Ed.  I'm pleased that the article brought value to you!

I'm sure George.  Getting an approval on the project-level does not mean there will be no issues on the loan-level.

You're welcome Joan.  Thank you for reading.

It certainly adds to the challenges, Myrl

Laura - no it doesn't!

That's a tough situation, Peggy and I would hire an attorney or file a complaint with the state's Department of Consumer Protection.

Gita - that is a great point and one that I completely left out.  I will have to add this to the above article.   Thank you!

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) over 4 years ago

Eric, it's good to know the FHA is taking this approach when evaluating the approval process.

Posted by Michael Setunsky, Your Commercial Real Estate Link to Northern VA over 4 years ago

Hi Michael - I think that they may have been tougher in this area in the past which leads folks to think that pending litigation is a deterrent from obtaining an approval

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) over 4 years ago

Hey, Eric!  I included this post in today's Last Week's Favorites.

Posted by Patricia Kennedy, Home in the Capital (RLAH Real Estate) over 4 years ago

Great post on a poorly understood topic... I've save for future reference. Thanks for the clear explanation, Eric.

Posted by Nina Hollander, Your Charlotte/Ballantyne/Waxhaw/Fort Mill Realtor (Coldwell Banker Residential Brokerage | Charlotte, NC) over 4 years ago

Thank you very much Patricia!

I'm glad that you found it useful, Nina.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) over 4 years ago

This is valuable information for buyers and sellers. I have a buyer who is pursuing the purchase of a townhouse in a community that has a pending lawsuit against the HOA.

Posted by Sharon Parisi, Dallas Homes (United Real Estate Dallas ) over 4 years ago

Hi Sharon - good luck with that!  Hopefully, the lawsuit is not detrimental to the sale.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) over 4 years ago

Eric thanx for suggestion to file a complaint with State Department of Consumer Protection or hire a lawyer. How can State Dept of Consumer Protection be of help?

Posted by Peggy J. D'Amato over 4 years ago

Participate