FHA
HUD LOAN Underwriting Requirements
Most people in the industry have interpreted this as a complete elimination of the requirement for a condominium association to have a reserve study. That is simply not true, and a careful reading of the language that remains in FHA Mortgagee Letter 2009-46 B shows that a reserve study is still required.
Shown below are the citations and excerpts from FHA Mortgagee Letter 2009-46 B that mandate the reserve study requirement. Admittedly, the letter nowhere contains the explicit statement "prepare a reserve study," which is unfortunate. However, the meaning of the language excerpted below from the letter cannot be interpreted to mean anything other than "prepare a reserve study."
The Letter is divided into several sections.
"Project Approval," item II - Eligible Projects, states "The Condominium Project has been declared and exists in full compliance with applicable State law requirements of the jurisdiction in which the condominium project is located, and with all other applicable laws and regulations."
What this means is that if state law happens to require a periodic reserve study, then the Condominium Project MUST HAVE A RESERVE STUDY. Otherwise, it clearly cannot be in compliance with applicable state law. Some states that have laws requiring reserve studies are; California, Hawaii, Washington, Nevada, Ohio, Delaware, and Florida. If your condominium project is located in one of these states, you MUST have a reserve study prepared.
"Project Approval," item V - Project Eligibility Requirements # 11 - Budget Review, states " . . . This review must determine that the budget is adequate and:
- Includes allocations/line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project. . . ."
There is NO WAY to make this determination short of preparing a reserve study. Those who certify condominium projects as being compliant without having a reserve study are taking a large risk.
This same section goes on to state "In cases where the budget documents do not meet these standards, the mortgagee may request a reserve study to assess the financial stability of the project. The reserve study cannot be more than 12 months old."
This language clearly assumes the existence of a reserve study, and states that FHA has the right to demand it.
"Loan Approval," item IV - Certifications, states "If a project has been previously approved, the lender must certify that it has reviewed and verified the condominium project's continued compliance with the initial approval requirements regarding investor ownership, percentage of owners in arrears for condominium association fees, owner-occupancy rate and FHA loan concentration rate, and the Lender certifies that the condominium project continues to comply with FHA requirements."
In essence, the Lender is certifying that a reserve study exists, per the above Project Approval requirements.
"Liabilities and Monitoring," item III - False Certifications, states "Title 18 U.S.C. 1014, provides in part that whoever knowingly and willfully makes or uses a document containing any false, fictitious, or fraudulent statement or entry, in any matter in the jurisdiction of any department or agency of the United States, shall be fined not more than $1,000,000 or imprisoned for not more than 30 years or both. In addition, violation of this or others may result in debarment and civil liability for damages suffered by the Department."
The potential penalties for failing to provide a reserve study are completely disproportionate to the level of infraction. However, the cost to comply, by preparing a reserve study, is very small. No one should knowingly take this risk.
