California E&S Insurance

How To X-Ray An HOA Before You Buy: Avoiding Money Pits & Mortgage Denials in California's Condo Market **TL;DR:** Your mortgage approval doesn't just depend on *your* credit—it depends on the HOA's financial health, litigation status, reserve funding, and dozens of other factors. This guide shows you exactly what lenders look for, where to find the information, and how to avoid buying into a condo that can't get conventional financing. # Why Your Lender Cares More About the HOA Than You Think When you buy a condo you're not just buying a unit, you're buying into a mini-government that controls your home's value, your monthly costs, and crucially, whether future buyers can get a mortgage. Fannie Mae and Freddie Mac (the GSEs) have extensive requirements that HOAs must meet before they'll purchase loans secured by units in those projects. Here's how the mortgage market actually works: Most lenders don't keep your loan. They sell it to Fannie Mae or Freddie Mac, who package loans into mortgage-backed securities (MBS) that investors buy. This secondary market is what makes 30-year fixed-rate mortgages possible at reasonable rates. But Fannie and Freddie won't buy just any loan, because the property and the project must meet their eligibility requirements. **What Fannie Mae evaluates about your project:** * Financial stability of the HOA * Physical condition and marketability of the project * Legal structure and owner control * Insurance adequacy * Litigation exposure * Concentration of ownership * Budget and reserve adequacy * Delinquency rates * Commercial space ratios * Any pending termination or dissolution If the HOA fails these requirements, you may face: * Higher interest rates (non-warrantable pricing, typically 0.5-1.5% higher) * Larger down payments (often 20-25% minimum) * Limited lender options (portfolio loans only) * Difficulty selling (future buyers face the same restrictions) * Declining property values as the financing stigma becomes known The kicker? Most buyers never know about these issues until they're deep into escrow. Real estate agents often don't understand GSE project requirements. Even some loan officers don't catch these issues until the file goes to underwriting. By then, you've spent money on inspections and appraisals, the rate lock clock is ticking, and you're emotionally invested. This guide changes that. # Part 1: Understanding How Lenders Review Condo Projects # The Three Review Types https://preview.redd.it/zqumh9qrxd9g1.png?width=2816&format=png&auto=webp&s=4c88ae3acbc5254bdf11f41bf1bdcd1c4bcfd42b Fannie Mae uses three levels of project review, each with different requirements and implications **1. Waiver of Project Review (Least Scrutiny)** Certain property types qualify for a complete waiver of project review: * **Detached condo units**: Must be completely detached with no shared walls, ceilings, floors, or architectural elements connecting to another unit * **2-4 unit condo projects**: Small projects with only 2-4 total units * **PUD projects**: Planned Unit Developments (except manufactured homes with land trusts, deed restrictions, ground leases, or shared equity arrangements) * **Fannie Mae to Fannie Mae limited cash-out refinance**: If the existing loan is already owned by Fannie Mae and the new loan is ≤80% LTV **Critical exception**: Manufactured homes are *never* eligible for project review waiver, regardless of the project type. Even with a waiver, certain basic requirements still apply: * Project cannot be listed as "Unavailable" in Fannie Mae's Condo Project Manager (CPM) database * Cannot be a condo hotel, motel, houseboat, or timeshare * Must meet assessment priority limits (more on this below) * Must meet insurance requirements * Cannot have critical repairs needed or be under evacuation order (for refinances) * Cannot be terminating or insolvent **Where to verify**: Your lender can check CPM status. You can ask them to confirm the project isn't flagged as "Unavailable." **2. Limited Review (Moderate Scrutiny)** Limited Review is for **attached units in established condo projects only**. This is the most common review type for typical condo purchases. **LTV/Loan Limits:** |Occupancy Type|Maximum LTV| |:-|:-| |Principal Residence|90%| |Second Home|75%| |Investment Property|75%| Note: Florida has more restrictive LTV limits for condos. If you're buying in Florida, expect additional requirements. **Key Requirements for Limited Review:** * No more than **15% of total units** can be 60+ days past due on regular HOA assessments * No more than **15% of total units** can be 60+ days past due on any special assessment * Project must meet general eligibility standards * Cannot be an ineligible project type (see Part 2) * No manufactured homes **Where to find delinquency data**: Request the HOA's current financial statements and accounts receivable aging report. The management company should be able to provide this. Look for both regular assessment delinquencies AND any outstanding special assessments. **3. Full Review (Most Scrutiny)** Full Review applies to: * New condo projects (not yet 90% sold or HOA not yet controlled by owners) * Newly converted condo projects * Any project that doesn't qualify for Limited Review * Projects with manufactured homes Full Review requires lenders to use Fannie Mae's **Condo Project Manager (CPM)** tool and verify extensive project documentation. CPM status designations include: |Status|Meaning| |:-|:-| |Certified by Lender|Lender has certified project meets requirements| |Approved by Fannie Mae|Fannie Mae reviewed and approved (via PERS or other process)| |Conditional Approval|Approved pending certain conditions—loans cannot be sold until conditions met| |No Fannie Mae Review|Lender can certify based on Selling Guide requirements| |**Unavailable**|Project is INELIGIBLE—loans cannot be sold to Fannie Mae| |Guide Ineligible|Data entered by lender shows project doesn't meet requirements| **Additional Full Review Requirements:** 1. **Budget Adequacy**: The HOA's projected budget must: * Include allocations for all appropriate line items * Provide **minimum 10% of budget** for replacement reserves 2. **How the 10% reserve calculation works**: Divide annual budgeted replacement reserve allocation by annual budgeted assessment income (regular HOA fees). You can exclude: * Incidental income not relied upon for operations * Utility income collected for services like cable/internet * Income already allocated to reserves * Special assessment income 3. **Reserve Study Alternative**: A lender may accept a reserve study instead of the 10% calculation if: * Study demonstrates adequate funded reserves equivalent to Fannie Mae's standard * Project's funded reserves meet or exceed the study's recommendations * Study was completed within **3 years** of the lender's project approval date * Study was prepared by an independent third party with demonstrated expertise 4. **Owner-Occupancy for Investment Properties**: For investment property loans in established projects, at least **50% of units** must be conveyed to principal residence or second home purchasers. REO units for sale (not rented) count as owner-occupied. 5. **Contiguous Land**: The project must be on contiguous parcels (can be divided by public or private streets). 6. **Gut Rehabilitation Conversions**: If the project was a condo conversion via gut rehab within the past 3 years, an architect's or engineer's report must confirm: * Structural integrity * Condition and remaining useful life of major components (HVAC, plumbing, electrical, elevators, boilers, roof, etc.) **Where to verify Full Review status**: Ask your lender to pull the CPM status for the project. If it shows "Unavailable" or "Guide Ineligible," you have a problem. # Freddie Mac Differences Freddie Mac's requirements are similar but not identical. Key differences: * Freddie uses different terminology and section numbers ([Chapter 5701](https://guide.freddiemac.com/app/guide/chapter/5701)) * Some LTV limits and occupancy requirements vary slightly * Reserve requirements may differ in specific calculations * Always verify with your lender which investor's guidelines apply # Project Review Expiration Timelines Project approvals don't last forever. Here's when reviews expire: |Review Type|Expiration| |:-|:-| |Limited Review|1 year from certification| |Full Review (Established Project)|1 year from certification| |Full Review (New Project)|180 days from certification| |CPM Approved by Fannie Mae|Valid as of note date| |FHA Approved|Valid as of note date| **What This Means for You:** If you're buying in a project that was reviewed a while ago, the lender may need to recertify it. If project conditions have changed (new litigation, delinquencies spiked, special assessment levied), the project might no longer qualify. # Part 2: What Makes a Project Completely Ineligible This is where deals die. If your condo project falls into any of these categories, **Fannie Mae & Freddie Mac financing is off the table**, period. No amount of excellent personal credit or large down payment fixes these. # Hotels, Motels, and Resort Properties A project is ineligible if it operates as or has characteristics of a hotel or motel: **Automatic Disqualifiers:** * Project is licensed as a hotel or motel * Restrictions on owner's ability to occupy their unit * Required rental pooling arrangements * Unit owners must share profits with HOA or management * Project has transient, hotel-like character * Hotel services provided (front desk registration, daily housekeeping, central phone/key systems) * Hotel/motel conversion that wasn't a gut rehabilitation **Voluntary Rental Programs That Kill Eligibility:** * Rental pooling with blackout periods restricting owner occupancy * Management by a hotel or resort company * Marketing primarily as a hotel, resort, or investment opportunity * Obtaining hotel ratings (star ratings, AAA ratings, etc.) **Red Flags Indicating Hotel Character:** * 75%+ of units are investment properties or second homes * Units smaller than 400 square feet * Units lack full kitchens * Units advertised for daily rental on travel sites * Franchise agreements with hotel chains * Resort location with extensive amenities * Hotel-style amenities: spa services, concierge, equipment rentals, childcare, airport shuttles, ski passes * Units with adjoining interior doors to neighboring units **Where to find**: Review the CC&Rs for any rental pooling provisions or occupancy restrictions. Check online travel sites for the project name. Ask the HOA about any management agreements with hospitality companies. # Multi-Dwelling Unit Condos This one catches many buyers off guard, particularly in older urban buildings in bigger cities like New York, Chicago, and San Francisco that have large block condominiums where some owners decide to combine more than one unit. **The Rule**: A condo unit that has been **subdivided into multiple separate dwelling units** is ineligible for conventional financing, even if all dwellings are owned by the same person. **The Combined Units Problem**: Say you find a "2-unit" for sale where the seller bought two adjacent studios years ago and combined them into one larger unit by knocking down a wall. You want to buy it as one unit. Here's where it matters: * **If the units were legally combined** (single deed, legal documents amended, construction completed to merge them into one legal unit): **ELIGIBLE** * **If the units remain two separate legal parcels** but are just physically connected: **INELIGIBLE** The test is whether the combined space is now **one legal unit** or still technically **two legal units being used together**. **Another Common Scenario**: A single condo unit that was divided into a primary residence plus an accessory dwelling unit (ADU) or in-law unit. This creates a "multi-dwelling unit" from what was originally one dwelling, making it ineligible. **Exception**: Some accessory unit situations may be considered on a case-by-case basis through Fannie Mae's Project Eligibility Review Service (PERS), but don't count on approval. **Where to verify**: Check the deed, legal description, and HOA records. Are you buying one parcel or two? If the "unit" has two separate parcel numbers, two separate HOA voting interests, or is described as "units A and B" rather than "unit A," you likely have a multi-dwelling situation. # Non-Real Estate The following are simply not mortgageable: * Houseboats * Boat slips (unless owned by HOA as common amenity) * Cabanas (unless owned by HOA as common amenity) * Timeshare or interval ownership * Common interest apartments * Tenants-in-common (TIC) arrangements with ownership restrictions or mandatory rental pooling **San Francisco Note:** TIC arrangements are common in San Francisco, where multi-unit buildings were divided among multiple owners without formal condo conversion. These are generally not eligible for conventional financing. Some TIC units can qualify for specialized TIC loans, but expect portfolio lending with higher rates. # Continuing Care Retirement Communities Projects where unit owners have contracts for lifetime housing and healthcare are ineligible. The concern is that the healthcare component creates financial entanglements beyond typical HOA operations. **Exception:** Age-restricted communities (55+ or 62+) without lifetime healthcare contracts are eligible. The key distinction is whether you're buying into a housing arrangement or a housing-plus-healthcare package. # Live-Work Units Units designed for both residential and commercial use (artist lofts, home offices with storefronts) are eligible IF: * The project complies with local zoning requirements for live-work * The primary use is residential **Where to verify:** Check local zoning. Is the unit classified as residential, commercial, or a hybrid category? # Commercial Space Limits **The Rule**: No more than **35% of the project's total square footage** can be non-residential (commercial) space. **What Counts as Commercial:** * Retail stores * Restaurants * Office space * **Rental apartments** (not individually owned) * Hotels within mixed-use buildings * Any non-residential uses **What DOESN'T Count:** * Residential amenities for exclusive HOA use: fitness centers, pools, community rooms, laundry facilities * If commercial space is in a completely separate building (not attached to residential), it may be excluded **How to Calculate**: Non-residential square footage ÷ Total project square footage. Must be ≤35%. **Flood Zone Alert**: Projects with >25% commercial space in flood zones may require additional supplemental insurance. **Where to verify**: Request the project's site plan showing building uses. The HOA budget may break down assessments by residential vs. commercial—this can indicate the ratio. # Litigation Litigation can be a deal-killer, but the rules are more nuanced than many realize. The key is whether the litigation relates to **safety, structural soundness, habitability, or functional use** of the project. **What Makes a Project Ineligible:** * HOA or co-op is named as a **defendant** in pending litigation relating to safety, structural soundness, habitability, or functional use * Project sponsor or developer is named as a **defendant** in litigation relating to safety, structural soundness, habitability, or functional use * Pre-litigation activities (arbitration, mediation) that are reasonably expected to proceed to formal litigation on these issues **What Qualifies as "Minor Litigation" (Project Remains Eligible):** * Non-monetary litigation (neighbor disputes, rights of quiet enjoyment) * Litigation where the insurance carrier has agreed to defend AND the amount is covered by insurance * HOA is the plaintiff and the lender determines it's minor with insignificant financial impact * Reasonably anticipated damages and legal expenses won't exceed 10% of funded reserves * HOA is seeking recovery for issues already remediated/repaired, with no material adverse impact if funds aren't recovered * Localized damage to a unit that doesn't impact overall project safety, structural soundness, habitability, or function * HOA is plaintiff in foreclosure actions or past-due assessment collection **Personal Injury/Death Litigation**: Only qualifies as minor if the claim amount is reasonably known, the insurer has agreed to defend, AND damages are covered by insurance. **Construction Defect Litigation**: When the HOA is the plaintiff, this is NOT considered minor litigation UNLESS the issues have already been remediated/repaired AND there's no material adverse impact if funds aren't recovered. **Where to find**: Ask the HOA directly: "Is the association currently involved in any litigation, arbitration, or mediation, whether as plaintiff or defendant?" Request documentation. In California, HOAs must disclose pending litigation to buyers. # Single-Entity Ownership Concentration To prevent projects from functioning as disguised apartment buildings: **The Rule:** * In projects with **5-20 units**: No single entity can own more than **2 units** * In projects with **21+ units**: No single entity can own more than **20% of units** This includes units owned AND units leased/rented from others by the same entity. **Exceptions:** * Vacant units being actively marketed for sale * Units owned by affordable housing nonprofits * Rent-regulated units * Higher education workforce housing programs **Potential Waiver**: If the concentration is ≤49%, the entity is actively marketing to reduce to ≤20%, current on all assessments, and no special assessments pending, a waiver may be possible. **Where to verify**: Ask the HOA management company for an ownership breakdown. Who owns the most units? Are there any bulk owners or large landlords? # Critical Repairs and Deferred Maintenance This category has gotten increased attention since the Surfside, Florida tragedy. A project is ineligible if it has: **Material Deficiencies:** * Mold, water intrusion, or persistent leaks * Advanced deterioration of building systems * Failed inspections * Unfunded critical repairs exceeding **$10,000 per unit** expected within 12 months **Examples of Critical Repair Items:** * Sea walls * Elevators * Waterproofing/building envelope * Stairwells * Balconies and walkways * Foundation issues * Electrical systems * Parking structures **Evacuation Orders**: Any project under an evacuation order is automatically ineligible until the order is lifted and issues are remediated. **Special Assessments for Critical Repairs**: If the HOA has levied a special assessment specifically to fund critical repairs, the project remains ineligible until: * The repairs are **completed** (not just funded) * The special assessment is satisfied **Inspection Reports**: Lenders must review any inspection reports completed within the past 3 years. If those reports identify critical repair needs that haven't been addressed, the project is ineligible. **Where to find**: * Request copies of any building inspection reports, engineering studies, or reserve studies * Ask about pending or recent special assessments—what were they for? * Review HOA meeting minutes for discussions about deferred maintenance * In California: SB 326 required visual inspections of exterior elevated elements (balconies, walkways, stairs) by January 1, 2025. Ask if this inspection has been completed—if not, the HOA is legally non-compliant. # Non-Incidental Business Operations **The Rule**: If the HOA receives more than **10% of its total income** from active business operations, the project is ineligible. **What Counts as Active Business:** * Running a restaurant * Operating a spa or health club open to non-residents * Any commercial enterprise managed by the HOA for profit **Exceptions (up to 15% of income allowed):** * Recreational amenities for exclusive member use * Rental income from foreclosed units the HOA temporarily owns **Where to verify**: Review the HOA's budget and financial statements. Look at income sources—are there significant non-assessment revenue streams? # Recreational Leases and Mandatory Memberships If unit owners are **required** to pay fees to a third party for amenity access, the project is ineligible. **The Core Requirement**: The HOA must **own** its amenities or share them via HOA-to-HOA agreement with another homeowners association. **Red Flags:** * Amenities have a different name than the HOA * Large upfront fees to join a "club" * Monthly dues paid to a separate entity * Public memberships available to non-residents * Amenity facilities host public events for rental income * Blackout periods for owners **Where to verify**: Who owns the pool, gym, clubhouse, golf course? Review CC&Rs and any separate amenity agreements. # Termination and Insolvency **Automatically Ineligible:** * Projects voting on termination, deconversion, or dissolution * Projects subject to pending termination * HOAs in bankruptcy, insolvency, liquidation, or receivership # Part 3: Financial Health Deep Dive # The 15% Delinquency Threshold For both Limited and Full Review, the same delinquency standard applies: **No more than 15% of total units can be 60+ days delinquent on:** * Regular common expense assessments (monthly HOA fees) * Each individual special assessment **How to Calculate:** (Units 60+ days delinquent) ÷ (Total units in project) = Delinquency rate Example: 100-unit building with 16 units 60+ days past due = 16% = INELIGIBLE for Limited Review **Where to find**: Request the HOA's accounts receivable aging report. It should show how many units are 30/60/90+ days delinquent. # Reserve Funding Requirements Adequate reserves protect against future special assessments and indicate a well-managed HOA. **The 10% Minimum**: The HOA's annual budget must allocate at least 10% of assessment income to replacement reserves. **Reserve Study Alternative**: If a reserve study shows the project has adequate funded reserves meeting or exceeding the study's recommendations, the 10% calculation isn't required. **Reserve Study Requirements:** * Completed within **3 years** of lender's project approval * Prepared by an independent third party with demonstrated expertise: * Reserve study professional with credentials * Construction engineer * CPA specializing in reserve studies * Other professional with demonstrated knowledge and experience **What a Reserve Study Must Include:** * All major components needing repair/replacement * Condition and remaining useful life of each component * Estimated costs for repair/replacement * Annual contribution requirements (including inflation) * Analysis of existing funded reserves * Suggested funding plan **California Note**: Davis-Stirling Civil Code requires reserve studies to be updated at least every 3 years. Your HOA should have one—if they don't, that's a red flag. **Where to find**: Request the HOA's most recent reserve study. Review both the current funded status AND the recommended funding plan. Is the HOA actually following the recommendations? # Assessment Priority **The Rule**: HOA assessments can have priority over the mortgage lien for a **maximum of 6 months** of delinquent assessments. Some states have laws giving HOAs higher priority. For properties in those jurisdictions: * If the law was enacted **before January 14, 2014**: Grandfathered, may still be eligible * If the law was enacted **after January 14, 2014**: The 6-month limit applies **Where to verify**: Your title company and attorney can confirm the priority status in your state. # Part 4: California-Specific Requirements California has strong HOA disclosure requirements, but also unique issues—seismic concerns, wildfire risk, and an older condo stock with deferred maintenance. # SB 326: Balcony Inspection Law **The deadline passed on January 1, 2025.** California required all condo HOAs (buildings with 3+ units) to complete initial inspections by this date. The law mandates: * **Visual inspections** of exterior elevated elements (balconies, decks, walkways, stairways, and their railings) * Inspections by licensed architects, structural engineers, or contractors with relevant experience * **Inspections every 9 years** for elements that extend beyond the building's exterior walls and rely on wood or wood-based products for structural support * **HOA responsibility** to complete and fund inspections **The Surfside Connection:** This law responded to the tragic Champlain Towers South collapse in Florida (98 deaths). California has different risks—particularly dry rot in wood-framed balconies. **Why This Matters for Financing:** * If inspection reveals critical repair needs → project may become ineligible until repairs complete * **If HOA hasn't completed required inspection → they are legally non-compliant.** This is a massive red flag that goes beyond deferred maintenance—it suggests a failure of HOA governance. * Special assessments for balcony repairs → look at whether repairs are complete or ongoing **Important Note:** The deadline extension under AB 2579 only applied to rental complexes (SB 721), NOT condos. Condo HOAs have no extension—they should have completed inspections by January 1, 2025. **Where to verify**: Ask HOA about SB 326 inspection status, request the report, and ask about any identified repairs. If they haven't completed the inspection, ask why they're non-compliant. # SB 800 Construction Defect Claims California's SB 800 (the "Right to Repair" law) establishes procedures for construction defect claims. If a project is within 10 years of original construction and has defects, the HOA may have claims against the developer. **Financing Implications:** * Active construction defect litigation makes the project ineligible * Pre-litigation dispute resolution (required under SB 800) also triggers ineligibility * Even if the HOA hasn't filed suit, if they've sent a claim notice to the developer, financing may be affected **Where to verify:** Ask the HOA directly about any construction defect issues, whether any notices have been sent to the developer, and whether any dispute resolution or litigation is pending. # Davis-Stirling Requirements California's Davis-Stirling Act requires HOAs to: 1. **Distribute annual budget reports** including: * Operating budget * Reserve funding plan * Summary of reserve study * Insurance disclosure * Assessment and reserve funding disclosure summary (Form Pro Forma) 2. **Update reserve studies every 3 years** including: * 30-year projections * Component inventory * Condition assessment * Funding analysis * Percent funded calculation 3. **Disclose pending litigation, insurance, and assessments** to buyers 4. **Provide a Pre-Sale HOA Disclosure Package** including: * CC&Rs, Bylaws, Articles of Incorporation * Current year budget * Most recent annual financial statement * Reserve study summary * Pending special assessments * Insurance certificates * Any pending litigation **The California Disclosure Advantage:** California law requires sellers to obtain and provide the HOA disclosure package. You have a legal right to this information—review every page. **Where to find**: The seller must request and provide HOA documents. Insist on receiving them before removing contingencies. # California Earthquake Insurance Earthquake insurance isn't required by Fannie Mae, but most HOA master policies exclude earthquake damage. Individual owners typically need their own policy. After a major quake, uninsured buildings may face massive special assessments. # California Wildfire Risk In high fire hazard severity zones, HOA insurance costs have increased dramatically. Some insurers are exiting California entirely, with FAIR Plan as the last resort for some properties. # Part 5: The PERS Alternative # What is PERS? The **Project Eligibility Review Service (PERS)** is Fannie Mae's process for directly reviewing and approving projects that: * Are new or newly converted condos * Have unique characteristics that don't fit standard review processes * Need case-by-case evaluation * Include manufactured home condo projects # When PERS is Required Certain projects **must** go through PERS rather than standard lender certification: * Non-gut rehabilitation conversions with more than 4 units * Manufactured home condo projects * Projects with unique legal structures or characteristics # How PERS Works 1. **Lender Submission:** The lender submits project documentation to Fannie Mae's PERS team 2. **Fannie Mae Review:** Fannie Mae analysts review the documents and may request additional information 3. **Decision:** Project receives Approved, Conditional Approval, or Unavailable status # PERS Approval Benefits When a project is approved through PERS: * Approval applies to all lenders (not just the one who submitted) * Status is visible in CPM to all participating lenders * Reduces uncertainty for buyers and sellers in the project * May resolve eligibility questions that would otherwise kill deals # PERS Limitations * Takes time (weeks to months) * Not guaranteed to result in approval * Some projects are simply ineligible regardless of review method * Conditional approvals require additional steps before loans can close # Part 6: The Complete Pre-Purchase Checklist Here's your actionable checklist with specific sources for each item: # Basic Project Eligibility |Item|What to Look For|Where to Find It| |:-|:-|:-| |Project type|Detached, attached, 2-4 unit, PUD|Appraisal, tax records, CC&Rs| |CPM status|Not "Unavailable" or "Guide Ineligible"|Ask lender to check Fannie Mae CPM| |Hotel characteristics|No rental pooling, hotel services, or resort marketing|CC&Rs, online travel site search, management agreements| |Multi-dwelling|Single legal unit, not subdivided|Deed, legal description, HOA records| |Commercial ratio|≤35% non-residential space|Site plan, HOA budget breakdown| # Financial Health |Item|What to Look For|Where to Find It| |:-|:-|:-| |Delinquency rate|≤15% of units 60+ days past due|HOA accounts receivable aging report| |Reserve funding|10% of budget OR adequate reserve study|HOA budget, reserve study| |Reserve study age|Completed within 3 years|HOA reserve study (check date)| |Special assessments|None pending OR not for critical repairs|HOA disclosure, board meeting minutes| |Budget adequacy|Line items for insurance, utilities, reserves|Current year HOA budget| # Legal and Structural |Item|What to Look For|Where to Find It| |:-|:-|:-| |Litigation status|No litigation re: safety/structural/habitability issues; minor litigation OK|HOA disclosure, direct inquiry to management| |Construction defects|Resolved with no financial impact|HOA disclosure, board minutes| |Ownership concentration|No entity owns >2 units (5-20 unit projects) or >20% (21+ units)|HOA ownership report from management| |Critical repairs|No unfunded repairs >$10K/unit in next 12 months|Reserve study, engineering reports, board minutes| |Inspection reports|No unresolved critical findings in past 3 years|Request any inspection reports from HOA| # California-Specific |Item|What to Look For|Where to Find It| |:-|:-|:-| |SB 326 inspection|**Completed** (deadline was Jan 1, 2025—non-compliance is a red flag)|HOA records, direct inquiry| |Balcony repair status|Any identified repairs completed|Inspection report, board minutes| |Reserve study compliance|Updated within 3 years per Davis-Stirling|HOA annual budget report| |Disclosure compliance|All required documents provided|Seller's HOA document package| # Insurance |Item|What to Look For|Where to Find It| |:-|:-|:-| |Master hazard policy|Adequate coverage, HOA named insured|Certificate of insurance from HOA| |Fidelity/crime insurance|Covers employee dishonesty|HOA insurance certificate| |Liability coverage|Adequate limits for project size|HOA insurance certificate| |Flood insurance|If in flood zone, adequate coverage|HOA insurance certificate, FEMA flood map| # Part 7: Insurance Requirements Deep Dive Insurance is a sleeper issue that kills deals. The HOA must maintain adequate coverage, and gaps in coverage can make the project ineligible. # Master Hazard Insurance The HOA's master policy must cover all common elements, building structure, and commercial space at 100% insurable replacement cost. # Fidelity (Crime) Insurance Protects against theft by HOA employees or management. Minimum coverage: three months of assessments plus reserves (or state-required amount if higher). # Liability Insurance Commercial general liability coverage for bodily injury, property damage, and personal injury. Typically $1M minimum per occurrence. # Flood Insurance Required if any project area is in a Special Flood Hazard Area. Check FEMA flood maps. Projects with >25% commercial may need supplemental coverage. # Insurance Lapses = Ineligibility If HOA insurance lapses or is inadequate, the project becomes ineligible and may be flagged "Unavailable" in CPM. # Part 8: Red Flags Summary https://preview.redd.it/qj45s4auxd9g1.jpg?width=1024&format=pjpg&auto=webp&s=8d3ff5e5cbb8bf5d6d944a66183972c13dfb619c **Stop and investigate further if you see:** 🚩 **Project flagged "Unavailable" in CPM**—deal killer 🚩 **More than 15% of units delinquent**—may require different loan type 🚩 **Pending special assessment for critical repairs**—ineligible until repairs complete 🚩 **HOA defendant in litigation over safety/structural/habitability issues**—ineligible 🚩 **No reserve study or study is >3 years old**—financing may be difficult 🚩 **Reserve funding below 10% of budget**—request reserve study 🚩 **Units for daily/short-term rental**—hotel characteristics concern 🚩 **One owner holds many units**—ownership concentration issue 🚩 **Required payments to third party for amenities**—recreational lease concern 🚩 **Recent building inspection with unresolved findings**—critical repair concern 🚩 **HOA in construction defect litigation with unresolved repairs**—ineligible 🚩 **Two units being sold as one**—verify legal combination # Part 9: What To Do If Your Project Has Issues **If the project is ineligible for conventional financing:** # Option 1: Portfolio Loans Some lenders keep loans on their books rather than selling to Fannie/Freddie. These "portfolio lenders" can make their own eligibility rules. **Pros:** * Can finance non-warrantable projects * Some portfolio lenders specialize in complex situations **Cons:** * Higher interest rates (typically 0.5-1.5% above conventional) * Larger down payments (often 20-30% minimum) * May have prepayment penalties * Fewer lender options = less competition on terms # Option 2: Non-QM Loans Non-qualified mortgage products may have looser project requirements. **Pros:** * Can accommodate situations conventional loans cannot * Various programs for different scenarios **Cons:** * Significantly higher rates (often 1-3% above conventional) * Higher fees * May not be available from all lenders * Some have balloon payments or adjustable rates # Option 3: FHA Financing FHA has its own condo approval process through HUD's DELRAP (Direct Endorsement Lender Review and Approval Process). **Key Differences:** * FHA approval is project-specific, not just a lender certification * FHA has different (sometimes stricter, sometimes more flexible) requirements * Owner-occupancy requirements may differ * Check HUD's condo lookup tool to see if your project is FHA-approved **Where to verify:** Search HUD's Condo Approval List at [hud.gov](http://hud.gov) # Option 4: VA Financing VA has similar but different condo requirements. **Key Differences:** * VA maintains its own approved condo list * Some project types ineligible for Fannie may qualify for VA * Only available to eligible veterans, service members, and surviving spouses # Option 5: Cash Purchase If you can afford to pay cash, project eligibility becomes irrelevant for the purchase. **The Catch:** * Future buyers will face the same financing restrictions * Property values may be depressed due to financing limitations * Consider whether this is a smart investment given resale constraints # Option 6: Negotiate and Wait If issues are fixable, you might negotiate a longer escrow or make your offer contingent on resolution. **Examples of Fixable Issues:** * HOA completing deferred inspections * Paying down delinquencies below the 15% threshold * Resolving pending litigation * Completing repairs flagged in engineering reports # Option 7: Walk Away Sometimes the best deal is the one you don't make. Walk away if multiple eligibility issues exist, issues are structural, or similar properties in eligible projects are available. # Part 10: Common Misconceptions # "My lender said it's fine" Early loan approval is based on YOUR qualifications—credit, income, assets. Project review often happens later in underwriting. A lender saying "you're pre-approved" doesn't mean the condo project is approved. # "The last buyer got a conventional loan, so it must be warrantable" Project conditions change. A project that was eligible two years ago may not be today due to new litigation, increased delinquencies, special assessments, ownership concentration changes, failed inspections, or insurance lapses. # "I'm paying cash so project eligibility doesn't matter" It matters for resale. Future buyers will face financing restrictions. Properties in ineligible projects often sell at discounts because the buyer pool is limited. # "The seller/agent told me there are no HOA issues" Sellers and agents often don't know. HOA eligibility is a specialized area. Always verify independently. # "A big down payment will fix project eligibility problems" Down payment affects loan-to-value ratios, not project eligibility. If the project is ineligible, it's ineligible regardless of how much you put down. # "FHA/VA rules are the same as Fannie/Freddie" They're different. A project might be Fannie/Freddie eligible but not FHA-approved, or vice versa. # "Reserve study percent funded is the same as the 10% requirement" These are different metrics: * **10% budget allocation**: Annual contribution to reserves as a percentage of annual assessment income * **Percent funded**: Current reserve balance as a percentage of recommended balance Both matter, but for Fannie Mae's standard test, it's the 10% annual contribution. # Conclusion The HOA's health is as important as your own financial health when buying a condo. A project that fails GSE requirements can turn your dream home into a financing nightmare—both when you buy and when you eventually sell. **Before making an offer:** * Request all HOA documents * Ask your lender to pull CPM status * Review for the red flags in this guide * Don't assume the seller or listing agent knows the project's eligibility status The few hours spent investigating now can save you months of frustration and thousands of dollars later. *I'm a California mortgage loan originator (NMLS #81195) who has been originating loans since 2002. I've seen these issues torpedo deals countless times. Questions? Drop them in the comments.* **Sources:** * [Fannie Mae Selling Guide B4-2.1-01 through B4-2.2-06](https://selling-guide.fanniemae.com/sel/b4-2/project-standards) (updated through 2025) * [Freddie Mac Seller/Servicer Guide Chapter 5701](https://guide.freddiemac.com/app/guide/chapter/5701) * California Civil Code ([Davis-Stirling Common Interest Development Act](https://www.davis-stirling.com/HOME/Statutes/Davis-Stirling-Act-Civil-Codes)) * [California SB 326](https://carnaclaw.com/news-and-events/insurance-coverage-defense-litigation/understanding-california-sb-326-and-sb-721what-building-owners-and-hoas-need-to-know/) (Exterior Elevated Element Inspection Requirements)

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  "title": "How To X-Ray An HOA Before You Buy: Avoiding Money Pits & Mortgage Denials in California's Condo Market",
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