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That Doesn’t Count Towards the 10% Reserve Contribution

Mortgage and Lending with ReadySetLoan Condo Team LLC

fha condo approvalThat Doesn’t Count Towards the 10% Reserve Contribution

It’s budget season for many condominiums who run on a calendar year and we have run across an issue with several of our clients and potential clients.  Everyone knows that FHA (and Fannie/Freddie) require that a condominium contribute 10% of its budget to the reserve fund each year.  So when don’t the contributions count towards the 10%?

When the funds are already delegated to fund an existing liability.  We have seen this many times but let’s take a recent example:

A condominium client’s budget is $450,000 so the minimum that they should be transferring annually to reserves is $45,000.  On the budget, the reserve transfer line item is $130,000.  So they should be good, right?  Not in this case.  What the operating budget doesn’t show is that the association’s loan payments are made from the reserve account...loan payments that total $128,500 annually.

This means that out of the $130,000, the actual reserve contribution is $1,500, far shy of the required $45,000.  The $128,500 in loan payments is an existing liability so this part of the reserve contribution has already been spent.

It doesn’t matter whether or not the Association is paying for the loan from the Operating or Reserve account.  The liability exists and the Association must budget for it plus the 10% reserve contribution.

Thus, at the moment, this Association is not eligible for FHA Condominium Project Approval.  It will have to include both the loan payment and the 10% contribution for its budget for 2016 unless it can provide a reserve study which indicates that the current level of reserve funding is adequate.

Image courtesy of stuartmiles/freedigitalphotos.net


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The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA.  We have assisted nearly 200 condominiums and we can help your association.


ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.


Please contact us with any questions regarding FHA or VA condominium project approvals.  You can email me at askeric@readysetloan.com or call me at 404-433-4565. I will be happy to answer any of your questions.


FHA/VA Condo Approval Specialist

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 Check out our article in Common Interest magazine on page 19!

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Joyce Marsh
Joyce Marsh Real Estate LLC - Daytona Beach, FL
Joyce Marsh Homes

Thanks for sharing this useful information clarifying the condominium rules for the 10% reserves allocation 

Nov 10, 2015 08:57 PM
ReadySetLoan Team

Thank you for reading!

Nov 11, 2015 01:16 AM
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Eric Boucher Very interesting. I never considered that an HOA might have a mortgage also. What is the collateral?

Bill Roberts

Nov 11, 2015 01:12 AM
ReadySetLoan Team

Hi Bill - ready for this...future assignment of common charges.  If the HOA defaults on the loan payments, the lender has the authority to have the common charges assigned to it for payment.

In speaking with one such lender recently, he said that he can count on one hand the number of instances that he has heard of (not personally experienced) loan defaults.

Nov 11, 2015 01:17 AM
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Reserves are a challenge, the biggest issue I run into when I'm doing a mortgage. Some associations either don't seem to care, others are right on top of this stuff and it is an easy process.

Great job with your post!

Nov 11, 2015 03:02 AM
ReadySetLoan Team

Thank you Joe.  This is very common on my end as well which is what prompted the post!  That, and it's budget season for most condos

Nov 11, 2015 11:32 PM
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Eric Boucher Thank you for the answer. I've been thinking about it ever since you answered. I can "see" financing shared facilities instead of the developer paying for them and then adding it to the cost of the individual units.

How does this affect value?

Bill Roberts


Nov 11, 2015 11:20 PM
ReadySetLoan Team

Actually, in this case, the loan is in reference to an established condominium that didn't budget for large capital projects (many don't!) so they took out a loan at a very low interest rate to fund the siding and roofing project.  The common elements in a condominium really have no value to the lender as collateral because the association doesn't own them; the unit owners own them.  Therefore, the only thing that the association can pledge as collateral are the future collected common assessments.  That is the only thing that the association has that is of value.

As far as affecting marketability, if the loan payments require increased assessments or a special assessment, it could potentially decrease the value of the units (because prospective buyers would be able to spend less for the P&I piece of the monthly payment).  BTW - that is also HUD's question.

Nov 11, 2015 11:36 PM
Inna Ivchenko
Barcode Properties - Encino, CA
Realtor® • GRI • HAFA • PSC Calabasas CA

I just wanted to thank again Eric for this great blog and his great assistance, help and kindness to so many.

He will be missed......

Thoughts and prayers to his family.....

Nov 20, 2015 04:20 PM
Roy Kelley
Retired - Gaithersburg, MD

I was looking for your current blogs. I hope all is going well for you.

Jan 19, 2017 04:09 PM
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

It sure looks like you haven't been back for quite a while.    Hope you are doing well.

Mar 05, 2022 12:05 PM