In recent months while assisting condominiums to get certified and recertified with FHA, we are running into an issue that is a fairly simple one to avoid. We make it a point to remind our clients to contribute at least 10% of the budget to the reserve account annually. Not only does FHA require this, it is also a requirement to obtain conventional loans (Fannie Mae).
In reviewing the financials of several associations recently, we have seen that some are opting to spend money that was originally delegated to the reserve contribution. Rather than making the reserve contribution and later removing funds to pay for capital projects, they are “saving a step” by just skipping the deposit and withdrawal.
This is a big “no-no” when it comes to FHA certifications. FHA allows condominiums to use reserve funds for capital projects; that’s what it’s there for. However, associations must contribute the statutory 10% to the account during the year. Also, to clarify: it doesn’t have to be a net of 10% if the association is using reserve funds for capital projects during the year.
But, simply reallocating reserve funds for capital projects will cause delays in the processing of an FHA certification if the 10% contribution was not made. FHA will then ask for previous years’ financials (we have seen up to 4 years) to determine if the association has a history of making the reserve contribution or not.
If this cannot be determined, FHA will request a reserve study as a condition for certification. Many associations do not wish to bear the cost of a reserve study. In this case, they will have to wait until the closing of the current fiscal year to demonstrate that the proper contribution was made.
As mentioned, this affects conventional (Fannie Mae) financing as well. Fannie Mae also has the requirement that 10% of the association’s annual budget is to be contributed to a separate reserve account. Not doing so can prevent these loans in the community.
The obvious solution to this is to just make the deposits. When reserve funds are needed, they should be withdrawn from the reserve account.
Many associations are nearing the close of the 2014 fiscal year and are neck-deep in budget season. Please let this serve as a reminder to appropriately budget for the reserve contribution for 2015. In addition, make sure that the reserve account for 2014 was adequately funded as mentioned above. Both are imperative to the ability to finance units in the community.
Finally, it is important that the association does not finish the fiscal year with a net loss. We have seen FHA question losses as small as $257. If at all possible, breaking even or showing a small profit (even if it is taxable) is recommended to prevent delays in processing and certifications.
This article was written by Eric Boucher of ReadySetLoan.com Eric is a consultant who specializes in assisting condominium communities obtain certification for FHA and VA mortgage loans. He can be reached at firstname.lastname@example.org
Reprinted with permission.