FHA Condo Approval Specialist: That Doesn’t Count Towards the 10% Reserve Contribution

That Doesn’t Count Towards the 10% Reserve Contribution

fha condo approvalThat Doesn’t Count Towards the 10% Reserve Contribution

It’s budget season for many condominiums who run on a calendar year and we have run across an issue with several of our clients and potential clients.  Everyone knows that FHA (and Fannie/Freddie) require that a condominium contribute 10% of its budget to the reserve fund each year.  So when don’t the contributions count towards the 10%?

When the funds are already delegated to fund an existing liability.  We have seen this many times but let’s take a recent example:

A condominium client’s budget is $450,000 so the minimum that they should be transferring annually to reserves is $45,000.  On the budget, the reserve transfer line item is $130,000.  So they should be good, right?  Not in this case.  What the operating budget doesn’t show is that the association’s loan payments are made from the reserve account...loan payments that total $128,500 annually.

This means that out of the $130,000, the actual reserve contribution is $1,500, far shy of the required $45,000.  The $128,500 in loan payments is an existing liability so this part of the reserve contribution has already been spent.

It doesn’t matter whether or not the Association is paying for the loan from the Operating or Reserve account.  The liability exists and the Association must budget for it plus the 10% reserve contribution.

Thus, at the moment, this Association is not eligible for FHA Condominium Project Approval.  It will have to include both the loan payment and the 10% contribution for its budget for 2016 unless it can provide a reserve study which indicates that the current level of reserve funding is adequate.

Image courtesy of stuartmiles/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 6 commentsReadySetLoan Condo Approval Team • November 11 2015 04:03AM

Comments

Thanks for sharing this useful information clarifying the condominium rules for the 10% reserves allocation 

Posted by Joyce Marsh, Florida Real Estate, Premier Sotheby's International Realty (Premier Sotheby's International Realty) almost 2 years ago

Eric Boucher Very interesting. I never considered that an HOA might have a mortgage also. What is the collateral?

Bill Roberts

Posted by Bill Roberts, "Baby Boomer" Retirement Planner (Brooks and Dunphy Real Estate) almost 2 years ago

Reserves are a challenge, the biggest issue I run into when I'm doing a mortgage. Some associations either don't seem to care, others are right on top of this stuff and it is an easy process.

Great job with your post!

Posted by Joe Petrowsky, Your Mortgage Consultant for Life (Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709) almost 2 years ago

Eric Boucher Thank you for the answer. I've been thinking about it ever since you answered. I can "see" financing shared facilities instead of the developer paying for them and then adding it to the cost of the individual units.

How does this affect value?

Bill Roberts

 

Posted by Bill Roberts, "Baby Boomer" Retirement Planner (Brooks and Dunphy Real Estate) almost 2 years ago

I just wanted to thank again Eric for this great blog and his great assistance, help and kindness to so many.

He will be missed......

Thoughts and prayers to his family.....

Posted by Inna Ivchenko, Realtor® • Green • GRI • HAFA • PSC Los Angeles CA (Barcode Properties) almost 2 years ago

I was looking for your current blogs. I hope all is going well for you.

Posted by Roy Kelley, Roy and Dolores Kelley Photographs (Realty Group Referrals) 7 months ago

Participate