Picture this: You’ve found the perfect condo. It has the skyline view you’ve always wanted, the open-concept kitchen, and it’s priced right within your budget. You have a great credit score, your down payment is ready, and your lender says you are pre-approved. You are ready to pack boxes.
Then, everything comes to a screeching halt.
The lender calls with bad news—not about you, but about the building. “The condo project is non-warrantable,” they say. The deal falls apart because the Homeowners Association (HOA) didn’t pass the financial stress test required for a conventional loan.
In the world of condo buying, you aren’t just purchasing four walls; you are buying into a business—the HOA. If that business is failing financially, lenders generally won’t let you use a conventional loan to buy a share of it.
At Condo Approval Professionals, we see this scenario play out daily. Understanding the intricate link between an HOA’s balance sheet and your mortgage approval is the single most important step in protecting your investment.
Why Do Lenders Care So Much About the HOA’s Wallet?
When a bank lends you money for a single-family home, they worry about the condition of the house and your ability to pay. When they lend on a condo, the risk profile changes dramatically.
Lenders, specifically those originating conventional loans backed by Fannie Mae and Freddie Mac, view the HOA as a massive liability risk. Why? Because if the roof caves in and the HOA has $0 in the bank, the homeowners get hit with a “special assessment”—a mandatory fee that can range from $5,000 to $50,000 or more per unit.
If you, the borrower, suddenly have to pay a $20,000 assessment on top of your mortgage, you are statistically more likely to default on your loan. Therefore, lenders scrutinize the HOA’s financial health to ensure the building isn’t a ticking time bomb of deferred maintenance and debt.
What Are the Specific Financial Requirements for a Conventional Loan?
For a condo to be eligible for a conventional loan (a status often called “Warrantable“), the HOA must meet strict financial guidelines set by the Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac.
These aren’t just suggestions; they are rigid requirements. If the HOA fails these tests, the project is flagged, and conventional financing disappears for everyone in the building until the issues are resolved.
The scrutiny typically focuses on three pillars:
- Reserve Funding
- Delinquency Rates
- Budgetary Solvency
How Does the “10% Rule” for Reserves Work?
The most common deal-killer we encounter is the “Reserve Requirement.”
Fannie Mae and Freddie Mac typically require that the HOA allocates at least 10% of its annual operating budget specifically to a reserve fund. This is a line item in the budget that cannot be used for paying the water bill, the property manager, or landscaping. It must be earmarked for long-term capital replacements (like a new roof, elevator repairs, or repaving the parking lot).
Here is the math lenders look at:
- Total Annual Budget: $100,000
- Required Reserve Contribution: $10,000 (10%)
If the HOA’s budget only shows a $5,000 contribution to reserves (5%), the project fails the review.
Why is this strict?
Lenders know that buildings age. If an HOA isn’t saving 10% a year, they are likely deferring maintenance. Deferred maintenance leads to structural failure (as seen in tragic events like the Surfside collapse) or massive special assessments that bankrupt homeowners.
Can a “Limited Review” Save the Deal?
You might be asking, “Is there a loophole?” Sometimes, yes. It’s called a Limited Review.
If you are putting down a substantial down payment—typically 10% to 25% or more (depending on whether it is a primary residence or investment property)—the lender may opt for a Limited Review.
In a Limited Review, the lender skips the deep dive into the HOA’s budget and reserve study. They focus on fewer criteria, such as:
- Is the project complete?
- Is there litigation?
- Is there adequate insurance?
However, relying on a Limited Review is risky. Just because the lender doesn’t check the reserves doesn’t mean the reserves are healthy. You might close the loan only to be hit with a massive assessment six months later. Furthermore, if you plan to sell in the future to a buyer with a lower down payment (who needs a Full Review), you might find your unit unsellable.
What Is the Impact of Delinquent Dues?
Financial health isn’t just about what is in the bank; it’s about cash flow. Lenders look closely at the Accounts Receivable on the HOA’s balance sheet.
The 15% Threshold:
Fannie Mae and Freddie Mac generally stipulate that no more than 15% of the total units can be 60 days or more past due on their HOA dues.
If you live in a 100-unit building and 16 people haven’t paid their dues in two months, the building is non-warrantable. This creates a “death spiral.” Owners stop paying, the HOA raises dues to cover the gap, more owners stop paying, and because no one can get a conventional loan to buy the units, values plummet, trapping the current owners.
How Do Special Assessments Affect Approval?
A special assessment is a levy charged to unit owners to cover costs that exceed the operating budget. While not always a deal-killer, they are a major red flag.
Lenders will ask:
- Why was it issued? (Was it for a luxury upgrade like a new gym, or a critical repair like a failing foundation?)
- How is it being paid? (Is it a lump sum or a loan?)
- Does it impact the borrower’s DTI? (The monthly payment for the assessment is added to your debt-to-income ratio).
If an HOA has a history of frequent special assessments, it indicates poor financial planning. Lenders prefer consistent monthly dues that are high enough to fund reserves over artificially low dues that require panic-funding through assessments.
What Happens if the HOA Is Deemed “Non-Warrantable”?
If the HOA fails the financial health check, the condo is classified as “Non-Warrantable.” This has immediate and severe consequences:
- Conventional Loans Denied: You cannot use a standard 30-year fixed Fannie/Freddie mortgage.
- Higher Interest Rates: Buyers must resort to “Non-QM” (Non-Qualified Mortgage) or portfolio loans, which often carry interest rates 1% to 3% higher than the market average.
- Larger Down Payments: Portfolio lenders often require 20-30% down to mitigate the risk of the bad HOA.
- Reduced Property Value: Because the pool of eligible buyers shrinks (eliminating those with 3% or 5% down payments), demand drops, and prices typically follow.
How Can You Check the HOA’s Health Before Making an Offer?
Smart buyers—and smart real estate agents—do their homework before the appraisal is even ordered. Here is how you can protect yourself:
- Request the Budget: Ask for the current year’s operating budget immediately. Look for the “Reserve Contribution” line item. Is it 10% of the total income?
- Ask About Delinquencies: Ask the listing agent, “Are more than 15% of owners behind on dues?”
- Check the Meeting Minutes: Read the last 12 months of HOA board meeting minutes. This is where you find the dirty laundry—discussions about leaks, lawsuits, and lack of funds.
- The Condo Questionnaire: This is the formal document lenders use. While usually ordered by the lender, getting the answers early can save you weeks of heartbreak.
Conclusion: Don’t Navigate the Minefield Alone
The financial health of an HOA is the invisible foundation of your condo investment. A beautiful lobby and sparkling pool mean nothing if the association is insolvent and ineligible for financing. Whether you are a buyer trying to close, a seller trying to market your unit, or a board member trying to fix your community’s eligibility, the rules of conventional financing are complex and ever-changing.
A “Non-Warrantable” designation doesn’t have to be permanent. With the right guidance, budgets can be restructured, reserve studies can be updated, and projects can be brought back into compliance.
That is where we come in. At Condo Approval Professionals, we specialize in peeling back the layers of HOA financials to ensure compliance with FHA, VA, and Conventional guidelines. We help turn “Denied” into “Approved.”
Don’t leave your approval to chance.
Contact Condo Approval Professionals today to ensure your condo project meets the gold standard for financial health and loan warrantability.
HOA Financial Health: Frequently Asked Questions (FAQ)
Q: Can I get a conventional loan if the HOA reserves are under 10%?
A: Generally, no. Fannie Mae and Freddie Mac usually require a 10% line item in the budget for reserves. However, in some rare cases, a recent “Reserve Study” that justifies a lower funding amount might be accepted, but this is difficult to clear and depends heavily on the underwriter’s discretion.
Q: What is the difference between a Full Review and a Limited Review?
A: A Full Review involves a deep dive into the HOA’s budget, bylaws, litigation, and insurance, and is required for lower down payments (usually under 10-25%). A Limited Review requires a higher down payment (usually 10% for primary homes in some regions, or 25% elsewhere) and bypasses the strict budget and reserve analysis.
Q: Does pending litigation always deny a conventional loan?
A: Not always, but often. If the lawsuit involves structural safety, health issues, or amounts that exceed the HOA’s insurance coverage, it will likely cause a denial. Minor slip-and-fall cases covered by insurance are usually acceptable.
Q: How do I know if a condo is already approved for conventional financing?
A: Unlike FHA or VA loans, which have public “approved lists,” Fannie Mae and Freddie Mac do not maintain a public database of approved condos. Conventional approval is typically determined on a loan-by-loan basis via the Condo Questionnaire.
Q: Why are my HOA dues so high if the building is old?
A: Older buildings often require higher maintenance and more aggressive reserve funding to replace aging infrastructure (pipes, roofs, boilers). High dues often indicate a responsible HOA that is preparing for these costs, whereas low dues in an old building can be a red flag for future special assessments.