T.S. from Virginia writes:
Dear Mister Condo,
I am trying to sell my condo townhouse that I have owned for many years. I found a buyer and accepted his offer. Right before closing the lender said that they could not complete the mortgage for the buyer because the condo HOA is not FHA compliant. I have never heard of anything like this. Can you explain it to me?
Mister Condo replies:
T.S., I am sorry you find yourself in this predicament. It may be of no consolation to you but you are not alone in your struggle. The Federal Housing Administration (FHA) is the single largest underwriter of homeowner mortgages. Banks and other lenders that provide mortgages count on the FHA to back the mortgages they write as long as they follow the guidelines laid out by the FHA. Since maintaining FHA compliance is considered a best practice for mortgage-originating banks, you will find that almost all require FHA compliance when providing mortgage funds. Condominiums are different that single family homes when it comes to qualifying for FHA compliance. In order for any individual units within a condo association to be eligible for FHA-backed mortgages, the entire association must be FHA certified. This is a fairly simple process but it does require the association to seek this certification. The FHA does not simply grant it. The association must apply and it must also meet certain guidelines to be approved. The most common reason association either don’t qualify or choose not to try to qualify is an underfunded Reserve Fund. Current FHA guidelines require no less that 10% of the common fees collected each year be deposited into a Reserve Fund. While a great deal of associations exceed that amount, many do not and cannot qualify for FHA certification because of it. There is a myriad of other reasons associations choose not to get FHA certification but the bottom line is that without this certification, traditional mortgage lenders cannot offer individual unit mortgages to borrowers within the association. In this case, it might even cost you your sale unless your buyer can find another method of mortgaging the property or pay cash. You can and should petition your Board to get the association FHA certified as I am sure you are not the only unit owner facing this challenge when trying to sell or refinance their condo. Good luck!