Recently, we were contacted by a property management company for assistance with an FHA condominium project approval. The project had been submitted to and was rejected by FHA for three reasons. Yesterday, the property manager informed us that conventional loans were now being rejected because of the comments on the FHA Approved Condominiums List.
The condominium was rejected for the following:
- Leasing restriction not in compliance;
- Balance sheet did not show a separate bank account for reserve funds; and
- No evidence provided for Fidelity/Crime policy for HOA or management company.
I won’t say much about #1 because the Fannie Mae Sellers Guide doesn’t make mention of condominium project ineligibility based on leasing restrictions. It does, however, say that projects are ineligible if they “restrict the unit owner’s ability to occupy the unit”.
Fannie Mae, like FHA, require that condominium projects contribute 10% to a reserve account annually. Reserve funds must be held in an account that is separate from the operating funds. The balance sheet of this condominium did not reflect that this was occurring. This not only rendered the project ineligible for FHA, but also for Fannie Mae.
Fannie Mae also requires condominium projects of more than 20 units to carry a Fidelity (or Crime/Employee Dishonesty) policy to protect against theft of monies of the association. If the condominium employs a property manager, the policy must show that the manager is covered or that the manager has its own policy which protects the association’s funds.
The fact is that this condominium project does have a reserve account but it is not noted as such on the balance sheet. All funds are lumped together in one line labeled “cash assets”. The association also has a Crime policy but the original submitter did not know to include evidence of this coverage in the submission package.
We will work to clear items #2 and #3 up quickly. The leasing restriction may take some time, especially if we need to file an amendment to the declaration.
Real estate agents and mortgage loan originators would be well-served to check the FHA Approved Condominiums List before submitting an offer or providing a pre-approval letter for condominium purchases. There could be notes on the FHA site that may prevent the buyer from obtaining a conventional mortgage.
Top Photo Credit: (c) Can Stock Photo / joyfuldesigns