FHA
HUD LOAN Underwriting Requirements
FHA
HUD LOAN Underwriting Requirements
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CONDO ALERT - Yes, condos have looked
attractive to many borrowers of lately because they are dropping in price in
several areas by more than a few dollars. But so many people are asking why
Condos are more difficult to purchase now than ever before. And so many are
complaining that lenders are being more difficult when purchasing condos. The
main reason? Many condo associations are under water when it comes to the
monthly dues that they collect. So for condominium associations in Washington
State having a reserve study is a state requirement and now a FHA/HUD
requirement for any association that has units for sale.
FHA rules have been readjusted, with new regulations (starting December 2009) that could make it more difficult for condominium buyers to obtain government-insured loans. The Department of Housing and Urban Development's (HUD) Mortgagee Letter 2009-19 will allow lenders greater flexibility when reviewing condominium documents. However, some of the FHA loan guidelines could have a restrictive effect on condominium borrowers. Among the various requirements is the need for a current Reserve Study.
"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.
** We recently got a call questioning this figure. Although its nowhere found in writing the 60% reserve requirement was issued by the Santa Ana HUD/FHA office. Since the Santa Ana office serves the Western region, their rule controls all loan guarantees in Washington State.
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1-866-618-7764 or Local 360-588-9956
http://www.PacCrestReserves.com
Pacific Crest Reserves is a locally owned company providing reserve studies, commercial inspection and condo inspections in the Mount Vernon, Wa. area. Pacific Crest Reserves is licensed by Washington State and employs Reserve Analysts that meet or exceed the requirements set by Community Association Institute. Pacific Crest Reserves conducts their Washington State building inspections according to the National Association of Home Inspectors Standards of Practice & Code of Ethics. Our professional standards provide a minimum guideline for conducting a Anacortes Washington Reserve Study.