Financing requirements can lead to disputes between condominium owners

Every condominium has a homeowner's association with a board of directors that decides issues related to the common areas. The effectiveness of the condo association often lies with the board, as well as the management company. A well run association will address maintenance issues as they arise and ensure proper reserves. A less active board may make it more difficult to sell or rent a unit.

Divergent interests of condo owners can easily spark disputes. Owners looking to sell a unit in a building may want to review association reserves and Federal Housing Administration financing requirements. Owners wanting to keep an investment property must investigate association rules on the number of allowable rentals.

Does the association have adequate reserves?

During the recession, the prices of condos dropped and many owners went into foreclosure. When owners defaulted, association dues and assessment went unpaid. Lenders were stuck paying these fees. Now tighter lending requirements mean that many mortgage companies inquire about reserves. Most lenders want to see at least 10 percent of the annual budget going toward a reserve rainy day fund. Lenders are generally stricter when a borrower has a smaller down payment.

The management company may not have brought up the issue of reserves at annual meetings, so many owners may not be aware of the issue. Or the board may not take the time or expense to obtain additional information and review reserves. In either case, insufficient reserves could reduce the pool of potential buyers who will qualify for financing.

FHA guidelines: limits on renters could lead to disputes

A second consideration is that many potential buyers will seek FHA Condominium Loans if they do not have a substantial down payment or do not meet conventional underwriting guidelines. FHA allows a buyer to finance up to 97 percent of a home loan and roll in some closing costs.

Late last year, the FHA made some changes to the condo financing requirements. Developments must now seek FHA approval and case-by-case review is no longer available. Many associations have not sought FHA approval and the process can take some time. Major guidelines include:

  • At least 51 percent of the units must be owner occupied
  • No one owner can own more than 10 percent of the units
  • There cannot be more than 15 percent of owners delinquent on condo dues

If one owner wants to ensure that the building qualifies for FHA approval, it may mean that rental policies need to be revisited. While the housing market continues to improve, the condo segment may lag as buyers have a tougher time securing financing. When conflicts arise between owners and the association, the representation of an experienced real estate attorney may be necessary.

If you are considering selling or renting your condominium, contact a real estate attorney who can spot potential issues. Homeowner's associations may also want to retain counsel to review whether the association has adequate reserves or should seek FHA approval.