HOA Issues Can Impact the Ability to Obtain Financing and Thwart Sales of Homeowner Properties

by | Feb 23, 2015 | Ownership and Transfer of Interest

Selling a condominium or a home that is part of a homeowners association involves lender inquiries into the business affairs of the homeowners association itself, and not just the intended borrower who is looking to obtain a mortgage on a unit or a home within the community. Typically this occurs in connection with either a refinance loan by a current owner or a new loan that has been applied for by a prospective buyer of a property located within the community.

Lenders that are asked to make loans on properties that are located within common interest developments that are controlled by a homeowners association will generally inquire into some, or all, of the following items that could impact the lender’s decision on whether or not to accept the property as collateral for the loan that has been applied for:

  • The extent of homeowner delinquencies in association dues and assessments;
  • The nature and extent of lawsuits that are pending against the association;
  • Details concerning any pending or contemplated construction defect claims or pending lawsuits that have been filed by the association;
  • The completeness and age of reserve studies that have been conducted by the association;
  • The nature and extent of the associations reserves;
  • Association insurance policies;
  • The number of units within the association that are owner occupied vs those that are leased to tenants.

Lenders (conventional institutional lenders, Fannie Mae, Freddie Mac, the FHA and VA) all have different requirements relative to the above described items that impact their loan underwriting criteria. Homeowners associations that have issues concerning the items that lenders inquire into should strive to take appropriate affirmative action to make sure their homeowners association is not negatively rated by lenders as the inability to obtain financing on properties that are part of a particular homeowners association will have a direct correlation on the marketability of those properties and will result in declining values or less appreciation than would otherwise have been realized.

Homeowners who contemplate selling their separate interest within a homeowners association should have current information available for prospective buyers and lenders regarding the above items for evaluation in connection with a financing transaction.