FHA Mortgage Mess Compounded by Federal Government Shut Down

M.L. from Fairfield County, Connecticut writes:

Dear Mister Condo,

Hello. I am selling my condo and received a letter from the buyer’s bank stating that the association is not allocating enough percentage of funds (currently 2.2%) to the Reserve account and that the budget needs to be changed to 10% or the sale will not go through. Closing date is supposed to be October 15^th. What are my rights if this true? We are modest-sized condo of less than 50 units built in the 1960’s. We have no pools, no playgrounds. Please help.

Mister Condo replies:

M.L., you are amongst a growing number of individuals who are experiencing first-hand the problems brought about by the ever-changing landscape of FHA mortgage approval for condominiums. The FHA is the governmental organization that backs most consumer mortgages these days. They have specific rules for condominium associations that make the units within the condominium either eligible or ineligible for FHA-backed mortgages. In the case of your condominium association it would appear that your association’s Reserve Fund has been deemed too low for the FHA to back the mortgage being offered by the lender to the buyer of your unit. The FHA is not blocking the sale of your unit but they are telling the bank that if they write the mortgage, the FHA will not insure the mortgage which would make it difficult for the bank to sell, which is what most banks do with their mortgages. As a general rule, banks comply with FHA rules as once the loan is written the banks rely on the FHA-backed insurance to protect them in the event of a mortgage foreclosure. Regardless of the age, amenities, or size of the condo the FHA requires certain things to be in place before they will insure mortgages issued to units within the condo.

As for what your rights are you may wish to consult with an attorney to discuss what you can do. I am not an attorney but I can tell you that in addition to the challenge of FHA certification for the condo complex, the government shutdown includes FHA and no new certifications or renewals will be issued as long as the federal government is shut down. I’m sorry to say that the chances of you closing on your unit with an FHA-backed mortgage for your buyer are not good. Of course, you are still free to sell your unit. You will need to find either a cash buyer or someone who can find a mortgage that is not backed by the FHA. Unfortunately, neither of those is in very high supply. Good luck.