Mortgage calculators, condos and HOAs

December 28th, 2010

If you own a condominium and are considering a refinance mortgage, or are considering a new home loan to purchase a condominium, your underwriting criteria are significantly different than they are for a single family home. The primary difference is the participation of the Homeowners Association (HOA) that controls the condominium complex. Mortgage calculators can be set for some underwriting guidelines, such as debt-to-income ratios or closing costs, but cannot help you with guidelines for approving HOAs. If you are using a refinance calculator or prequalification calculator to determine your payment options and/or qualification for a mortgage on a condominium here are some issues that will impact your mortgage approval.

Lender must approve HOA

Your mortgage application package will have three separate entities that will be underwritten: yourself, the appraised property and the HOA. On all mortgages the borrower and property are underwritten to ensure ability to repay the mortgage and the value and condition of the property. Because condominiums have HOAs that all owners in a condo complex must be members of they too need to be underwritten.

The purpose of the HOA being approved by the lender is because of the control the HOA has over the financial and physical condition of the complex and the property. When you purchase a condominium you are going into business with all the other owners, you are all partners in the Association. Together you will decide how much of the monthly dues revenue to set aside for reserves, how much to spend on maintenance, and when to replace major capital items such as roofs and plumbing.

Since the lender is loaning you the money for this business partnership the lender will want to ensure your new partners are on sound financial footing. Even though you may look good with the mortgage calculators, your HOA needs to look good as well.

HOA questionnaire

As part of your mortgage application package the underwriter will look at a condo questionnaire completed by the HOA or its management company. The questionnaire will ask:

  • How many units are in the complex?
  • How many are vacant?
  • How many are owner occupied?
  • Does any one entity own more than 10 percent of the units?
  • Are there any more phases of development?
  • What type of liability insurance and fiduciary bonds are in place?
  • Is there any on-going or pending litigation?
  • How long has the HOA been in control of the association?

The primary guidelines you need to know at this stage as you are considering your refinance mortgage or new home loan for a condo are if over 51 percent of the units are owner occupied and if any one entity (individual, corporation, trust, etc) owns more than 10 percent of the units. If the answers are "no" (less than 51 percent owner occupied) and "yes" (one entity owns more than 10 percent of the units) then you are going to be challenged obtaining loan approval.

There are some instances where litigation may not impact your approval but more often than not pending or on-going litigation will result in a denial for your mortgage application.

HOA budget

In the past few years many HOAs have been adversely affected by lack of dues from members who have quit paying not only their mortgage but also their association dues. In many instances banks have foreclosed on units and re-sold them without making up the overdue payments on the units through negotiated settlements.

With reserves being depleted, vacancies have created a financial crisis for condo owners who need maintenance and repairs to their common areas and buildings. An HOA with these issues is not one you wish to be entering into a partnership with, nor does your lender.

To ensure the financial health of your HOA the lender will require an annual budget approved by the board of directors outlining the revenue and expenses for the year. The budget must include a line item allocating at least 10 percent of dues revenue for reserves. As well a balance sheet will be required showing the HOA has cash available and a reserve account that is at least 10 percent of the annual dues of the association.

When you use mortgage calculators to determine your monthly payments for a condominium, be sure to include your HOA dues.

Insurance

Finally the underwriter will want to make sure the HOA has adequate insurance coverage. In a condominium the structures are common ownership and therefore must be protected by a master policy--is the coverage sufficient to replace the structure(s) if there is a fire? To protect the financial operation is there sufficient liability coverage and a fiduciary bond in place to protect from embezzlement or mismanagement of funds?

For any refinance mortgage or new home loan on a condominium, while the underwriting criteria are more stringent than for a single family detached home, the extra scrutiny protects you as a homeowner.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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