If you own a condominium or a property within a homeowners association, the association's behavior could derail your home sale.
The lender looks not only at your financial situation, but also at the financial condition of the condo association or HOA. When selling your home, you could face delays or even a canceled sale because of the association's problems, including:
- Delinquencies on association dues.
- Limited cash reserves.
- Too little insurance.
- Too many renters.
Any one of these issues could prevent a prospective buyer from getting a mortgage to buy your home, particularly if it is a condo.
Sellers within a condo or an HOA should ask questions before selling their homes, or they could face these unexpected financing issues.
"Homeowners should investigate the security of their association before listing their home, so they know what issues may or may not come up during negotiations with buyers," says Amy Tierce, regional vice president of Fairway Independent Mortgage in Needham, Mass. "Fannie Mae, Freddie Mac and (the Federal Housing Administration) all have guidelines in place to protect consumers from financial difficulties within an HOA or condo."
While conventional, FHA and Veterans Affairs loans all require condo associations to meet a variety of standards, owners within homeowners associations have just one issue that could delay buyers' ability to obtain financing.
"HOAs must have a master insurance policy that covers common areas and community amenities for liability issues," says Doug Benner, a senior loan officer with Embrace Home Loans in Rockville, Md. "Lenders require proof of adequate coverage before they'll approve a loan. I recently worked with a buyer in a community where the management was shopping for a new insurance policy. We had to push them to get the policy papers ready because the renewal date was the same day as the closing, and the loan couldn't close without the insurance document."
Tierce says Fannie Mae and Freddie Mac require at least $1 million in a master liability insurance policy for an HOA. She suggests the seller track down a copy of the master insurance policy before listing a home to check the amount and the renewal date.
"Most HOA and condo-management companies are willing to upgrade the insurance policy because they know it will impact every owner trying to refinance or sell," Tierce says.
Condominium issues for sellers
Condo financing rules have other requirements in addition to the master insurance policy, such as limiting the number of fee delinquencies to less than 15 percent of homeowners.
"The biggest issues that can prevent someone from obtaining financing on a condo are too many fee delinquencies, low cash reserves and the existence of a lawsuit for more than $100,000 in which the association is a defendant," says Ellen Hirsch de Haan, an attorney with Becker and Poliakoff in Clearwater, Fla., and a member of the Community Associations Institute. "The other big issue is the number of renters compared to owners."
Condos that meet FHA requirements are on an approved list accessible by the public as well as lenders. For example, the FHA says that in addition to having fewer than 15 percent delinquencies, 50 percent or fewer of the residents can be renters, and 10 percent of condo fees must be kept for cash reserves. Conventional financing has similar requirements, although Tierce says that if the buyers intend to be owner-occupants and the condo association has been established for at least three years, a limited project review can be done that may allow a loan approval in spite of a high ratio of renters.
Hirsch de Haan recommends that sellers check the records of their association, attend condo board meetings or read meeting minutes, review the budget, and ask for financial records to check for delinquencies.
"Sellers cannot do much on an individual basis other than talk to the board about issues that can hurt financing options," says Hirsch de Haan. "Ultimately, most of these issues require a long-term solution."
Benner recommends that a seller check with the condo management company to ask if the community has FHA approval, which can be a big selling point for buyers.
"You should ask if anyone is having trouble obtaining financing, and see if there's anything you can do," Benner says. "If, for instance, the number of delinquencies is right on the threshold, maybe you can work with the management association to put pressure on people to pay their dues since it is in everyone's interest in the community."
Tierce says sometimes there's nothing to be done about delinquencies until an owner gets caught up or the home is sold.
"The best option, if conventional, FHA or VA financing isn't available, is to find a portfolio lender who would be willing to approve a loan," Tierce says. "The buyer would usually need a larger down payment in that case of 25 percent or more."
Benner says portfolio lenders often charge a higher interest rate in addition to requiring a larger down payment.
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