Update – Early in 2022 Fannie Mae Freddie Mac changed their guidance – See our summary of that here

CONDO ALERT –  Yes, condos have looked attractive to many borrowers 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 is strongly recommended for any association that has units for sale.

FHA rules have been readjusted, with new regulations  for 2022 that relax some of the requirements that had been established previously. Previously the Department of Housing and Urban Development’s (HUD) Mortgagee Letter 2016-15  allowed the ratio of owner occupied units to drop to as low as 35% as long as the reserve contributions increase to 20% of their total budget.  The “10% of budget to Reserves” rule still applies to associations with an owner occupancy ratio over 50%.

Among the FHA HUD various requirements is the need for a current Reserve Study. Here is what they say:

“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.”

HUD Logo

For 2022 associations received new guidance from FHA/HUD:

  • Rentals vs. Owners: No more than 50% of the units can be investor-owned / rentals.
    • 10/26/2016 update – There is an exception to this rule, which reduces the required owner occupancy to 35% (so up to 65% can be rentals).  A special set of additional guidelines will apply.  Condo complexes with at least 3 years of very stable finances, low delinquency rates, and an up-to-date Reserve Study may qualify for this exception.
  • Commercial Space: No more than 50% of the property can be used as commercial space
  • Delinquent Dues:  No more than 15% of units can be delinquent in their HOA assessments for more than 60 days
  • Single Investor Ownership: For properties with more than 20 units, no single investor, entity, or related party may own more than 10% of the units within the project.  For properties with 20 units or less, no individual owner, entity, or related party may own more than one unit. (New rule as of 10/15/2019)
  • No more than 50% concentration of FHA Loans within the community

Reserve Requirements

  • Reserve funding requirement – at least 10% of all budgeted income must go toward a reserve account
  • Adequate reserve funds required – This is subjective, but in our experience this means:
    • Funds to cover all insurance deductibles
    • Reserve Funds to cover capital repairs and replacements for the next 2 years (as determined by a recent reserve study)