When you buy a single-family house, your lender will base a loan decision on your financial qualifications and the market value of the property. Condo buyers face a third level of scrutiny: the health of the condo association’s finances.

“When you are buying into a condo association you don’t own the specific unit’s land and structure, you own a percent of the association,” says Brian Koss, executive vice president of Mortgage Network in Danvers, Mass. “All of the costs, which only go up over time, are allocated based on your percent of ownership. So, if the condo association struggles collecting dues on time, it should give you pause as a potential owner. Odds are the association is running behind on its bills and isn’t saving money to its reserves. That means when the boiler goes or the roof leaks, the remaining members who do pay will be stuck with the bill.”

Koss says lenders are aware of the danger of an association that lacks sufficient reserves and one with a high proportion of owners who don’t pay on time. A high delinquency rate could impact financing options for buyers.

“There is a Fannie Mae and Freddie Mac limited review option available for condos that skips the delinquency rate,” Morgan Knull, an associate broker with Re/Max Gateway, says. “But FHA loan project approvals expire every two years and must be renewed. FHA permits no more than 15 percent of the units to be 60 days or more delinquent. If a condo can’t get an FHA approval because of a high delinquency rate that often exacerbates the downward spiral of the financial health of a condominium because existing owners aren’t able to do FHA refinances and prospective owners aren’t able to use FHA loans.”

If you’re trying to buy into a building that doesn’t qualify for an FHA approval, you’re limited to paying cash or requesting a “limited review” for a conventional loan, which often requires a 10 percent or 20 percent down payment, Knull says.

Buying a unit from sellers delinquent on condo dues

If you’re buying a condo from a seller who hasn’t kept up HOA payments, you’re going to have a tough time getting financing, Koss says.

“In some states, a condo association can place a lien against a condo property for unpaid dues, which can cause your mortgage to be declined or delayed until the lien is satisfied,” Koss says. “You can avoid trouble when financing a condo by researching the condo’s finances, finding out how many of its members are delinquent with dues and finding a trusted mortgage professional to help you through the process.”

Condo boards can discourage delinquencies and collect on accounts with a variety of tools that depend on the jurisdiction, such as denying access to amenities such as a pool or parking.

“I’ve even heard stories about condos denying elevator access to delinquent owners, although I also heard that this may not be legal,” Knull says. “If the delinquency concerns a property that is being rented, some condo regimes will instruct the tenant to make rental payments directly to the association, in order for it to collect the condo fee before remitting any balance to the owner. A financial judgment can be sought and obtained in court in order to force wage garnishment and a lien can be filed against the property title. The most drastic recourse is when a condo board files a foreclosure action for delinquent condo fees, which is permitted and sometimes occurs, including in Washington, D.C.”

Danger of mismanaged condo association dues

The bigger issue than your loan approval is that a high delinquency rate raises the question of whether the condo association is being competently managed, Knull says.

“A condo board has a fiduciary responsibility to its owners to maintain the financial health of the association,” Knull says. “If a board permits the percentage of delinquencies to grow and remain uncollected, it is failing to properly discharge its duty to the condo association’s owners. Encountering condo projects with excessive delinquencies is a turnoff to buyers, who see no upside to voluntarily incurring financial risk by purchasing in a community that doesn’t seem well managed or financially responsible.”

In other words, even if you’re able to finance a condo purchase in a building with a high percentage of unpaid dues, you may not want to buy it. The risk is that you could be responsible for larger assessments in the future to pay for deferred maintenance. In addition, it could be more difficult to sell in the future.

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