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Tuesday, November 9, 2010

FHA Condo Reserve requirement kicking Condos in the gut

The condominium/homeowners association must have at least 10% of its budgeted income designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible.

FHA reserve requirements as per FHA Mortgagee Letter 2009-46B This law was put in place over a year ago and it was delayed so that some kind of education and outreach from the agency that is required to fulfill this function. As well this would with a massive pr blitz community the need to condo come into compliance with something that was never asked of them before.
 ~why wait, why not have this as part of any plan that would require repair and maintenance of plant and equipment. Why did the regulators hide this from consumers -- this is a whole blog itself.
I'll go out on a limb and say most don't know that every condo that is backed by FHA loans are required to established a reserve fund.  Thats right and if you didn't get a reserve plan at closing that is a pretty good sign that your condo doesn't have one.
To be in compliance with this a base funding is set at 10% of your budget to be placed in a reserve account. 
So what will happen if your Condo did not set up the fund and didn't get it to the 10% level. Anyone that seeks to refinance or sell a property in said Condo --the loan will be rejected.  Yep, no FHA loans for anyone in your Condo.

Of course there is no official plan in plan by anyone anywhere to deal with this and the FANNIE Recertification requirement that comes up end of DEC as well.

Again, from Washington nothing.

We do have a plan and we'll need to get the help of everyone or we are going to wreak the entire US Economy.


Here is some more

"Reserve Study – a current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. A current reserve study must be no more than 12 months old – if recent events or market conditions have affected the finished condition of the property that information must be included. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed."
For existing associations with pre-owned condominiums, HUD underwriters require a current reserve study containing a funding projection which clearly indicates the percent funded level is 60% **or more at the time of approval. Once a particular association is approved for FHA lending guarantees there is no requirement that they re-qualify at a future date. However, that does not mean once you are approved by HUD you can forget about your reserve funding program. Even after an association has received HUD approval for FHA loans subsequent loan applications must include an updated reserve study as part of the document package submitted to underwriters. If the underwriters see evidence the reserves are not being funded as planned, or the percent funding amount has fallen to unacceptable levels, it could trigger the need for a new reserve study.
Not only must the reserve study provide a funding plan which indicates the reserves are 60% funded at the time approval is granted, but the association’s reserve account must be current in terms of the contributions which are required to maintain the funding levels indicated in the reserve study. Reserve contributions which are scheduled in the reserve study must be made on a monthly basis.
New condominium developments are treated somewhat differently than existing and converted condominium associations. New developments are said to be those which are newly constructed and are being sold by the developer to the first owner who will ever occupy the dwelling.
New developments are not required to maintain a specific percent funded level in their reserve account. What is required in order to gain approval for FHA loan guarantees is a current approved operating budget which includes a provision for a reserve transfer. The transfer must be adequate relative to the size of the association, its reserve funding obligations, etc.
While this may seem somewhat ambiguous what is important to understand is that the underwriters are looking at the budget and the reserve funding obligations of the association to develop a sense of whether there is a prudent plan for long range replacement funding in place.

1 comment:

deirdre g said...

Thanks fro sharing this post you have posted. Thanks for the read too.

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