Before it will ensure loans in a condo development the FHA wants to make sure the association is solvent. As a result, it wants to know about anything that could financially stress borrowers and could cause them to default on their loans.
Lawsuits & Assessments. As part of the certification process, the FHA requires explanations regarding lawsuits involving the association and special assessments.
Financial Status. The FHA wants to make sure the HOA is solvent. To that end, it requires three financial documents:
Income & Expense Statement. The end of year 'income and expense' statement is reviewed for contributions to the replacement reserve fund. Absent any contributions, FHA looks at "profit" and capital expenditures. FHA wants to see the advancement of capital expenditures or an increase over the year of the replacement reserve balance.
Budget. The annual operating budget is reviewed for both income and for anticipated contributions to the Replacement Reserve Fund again;
Balance Sheet. Finally a current balance sheet is reviewed to ascertain the current reserve balance.
Signing the Documents. Some companies that assist with FHA certification will sign Appendix 'A' on behalf of boards certifying that the association is in good standing per local, state and federal law and agreeing to notify the FHA if they become aware of HOA problems.
Onerous Penalties. The risk for an association board seeking FHA certification is the onerous penalties imposed by the federal government if information in the application is inaccurate--up to 30 years in federal prison and fines up to $1 million. The certification process is complicated and certification requirements sometimes impossible to verify. Although the certification language was softened on September 13, 2012, the severe penalties remain. Under the new rules, the association must certify:
To the best of my knowledge and belief, the information and statements contained in the condominium project application are true and correct; and
I have reviewed the condominium project application and it meets all current Federal Housing Administration (FHA) condominium approval requirements; and
I have no knowledge of circumstances or conditions that might have an adverse effect on the project (including but not limited to defects in construction; substantial operations issues; or litigation, mediation or arbitration issues).
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.