Condos, HOAs, and PUDs, Oh My

VA Lender’s Handbook Chapter 16 Summary

Chapter 16

Many borrowers are interested in using their VA loan benefits to purchase a home in a condo project, homeowners association, or planned unit development. Chapter 16 of the VA Lender’s Handbook addresses these types of residences and many of the unique expectations that go along with them. While we’ve written a short series of articles exclusively on Chapter 16, we wanted to give you a summary of the information so you can decide whether you want or need to delve into it further. So in this article, we’re going to summarize most of the important information in the chapter, and if you need more information on a particular portion, you can check out the rest of our articles on chapter 16.

 

The VA Approved Condominium List

The VA maintains a list of condo projects that they have approved for the VA guarantee. In order to get on this list, a condo project must have paperwork and agreements that are acceptable to the VA. The biggest thing they look for limits to the borrower’s freedom to sell or modify the property. Often, when condo projects are denied, it is due to a clause that the borrower must give the administrators of the condo first option to purchase the property when they want to sell, or other similar limitations or liens on the home. A condo project having a lien on the home will not automatically disqualify it (since pretty much every condo project has a lien of some kind on the home), but the VA will look into the lien and make sure that it does not violate their terms of approval. Only condominiums are on this list; the VA does not maintain a list of approved HOAs or PUDs (planned unit developments).

 

“Except Under Certain Circumstances”

If all of the VA’s title requirements for any common interest communities could be summed up in one phrase, that would be it. For example, “the estate must not be less than fee simple, except under certain circumstances” and “title must not be subject to unreasonable restrictions on use and occupancy, except under certain circumstances,” and “VA regulations require that every VA loan be secured by a first lien on the property, except under certain circumstances.” So to every rule there is an exception. Any sort of common interest community generally has to have a lien that is subordinate to the VA-guaranteed mortgage. The first lien is one of the rules that has very, very few exceptions. The property will need to undergo a VA appraisal and the property’s inclusion in a condo project or HOA will usually affect the valuation of the property either negatively or positively. In addition, the presence of nonresidential units in the project or area will also be evaluated and considered when making a valuation of the property.

 

The Notice of Value For Condos or PUDs

Multihousing ExpectationsEvery notice of value issued for a property in a condo or PUD will have the following statement on it: “This property is located in a development with mandatory membership in a homeowners’ association. The lender is responsible for ensuring that title meets VA requirements for such property and that homeowner association assessments are subordinate to the VA-guaranteed mortgage.” In the appraisal report, which includes the notice of value, the appraiser must use the Uniform Residential Appraisal Report, or if it’s a condo, the appraiser must use the Individual Condominium Unit Appraisal Report. The condo appraisal report is a bit different from the Uniform report because condos are different enough to warrant it.

 

Getting a Condo Project Approved

You can work with a lender to submit a condo project for VA approval if it’s not currently approved. To do so, the lender needs to provide a written request to the VA for approval and include a copy of the condo’s organizational documents. VA reviews the documents to make sure that they are in compliance with their rules and notifies the lender accordingly. In some cases, the VA may ask for further documentation, usually in response to incomplete submissions, but may also be a result of unsatisfactory documentation and a required change by the condo project in order to be approved.

 

VA Loan Condominium Approval Procedures Part 2

 

Deciphering the VA Lender’s Handbook Chapter 16 Part 4

 

The first thing we’re going to do in this article is explain the term “declarant”. From the name, you can guess that it means one who declares something. In the context of common interest communities such as a condo project, the declarant is usually the developer of the community who decides what restrictions they are going to place on the properties in the development. These restrictions, and the entirety of the organizational documents of the community, constitute what is called a “Declaration”, meaning that the writers of the organizational documents of the community are the declarants. Understanding this term is important when you’re considering buying a condo or a home in a common interest community, and it will help you understand the topics addressed in this article.

Making a Declaration

A community’s declaration (or equivalent document) is amended from time to time. The VA recommends that the declaration contain amendment procedures that require any amendments to be approved by at least 67% of the unit owners. While that is just a recommendation, the VA also requires that the association request VA approval of any proposed amendments before they can be recorded. This obviously only applies to projects that have already been approved by the VA for the VA guaranty. The VA expects that any amendments to the declaration, bylaws, or other enabling documentation will be approved by the VA for as long as the declarant is in control of the association. This shouldn’t affect you as the borrower too much, except that you can rest easy knowing that the Board of Directors can’t arbitrarily amend the documents in a way that will adversely affect you. However, if you’re wondering why sometimes it seems that most condo projects aren’t approved by the VA, it might have something to do with all the extra hoops the directors have to jump when they want to make changes to their declaration.

 

The organizational documents of the association or condominium might specify certain rights for the holders of the first lien on the home (whoever owns your VA loan). Usually this will only happen if the lender makes a written request to the Association for this to occur. The rights your loan holder may request are:

  • prior approval by first lienholders before the Association can
    • abandon condominium status or partition or subdivide a unit or the common elements
    • change the percentage interest of unit owners, or
    • materially amend the legal documents
  • timely written notice to first lienholders of
    • any condemnation or eminent domain proceeding, and
    • substantial damage or destruction to the common elements
  • the right to
    • examine the association books
    • receive annual audited financial statements and record, and
    • be given notice of association meetings and be entitled to a representative at such meetings.

Learning your VA Rights

Your right as the owner of the home will be clearly outlined in the organizational documents, and you have the assurance from the VA that those rights will not be affected in any way unless the VA approves the changes beforehand. Many common interest communities also require that a certain percentage of the homeowners agree to any changes (hence the term ‘homeowners association’). If you are worried about buying a home that is part of a homeowners’ association, you can look into the documents and history of the association, and even knock on some of the doors and ask your potential neighbors what their experience has been. In the end, you can always decide to purchase a home that is not part of a common interest community.

 

There are a lot of advantages to buying a home in a common interest community, particularly one that is focused on the things that are important to you. The VA does their best to protect veterans from the potentially ugly side of common interest communities, but penalties for breaking the rules of the community can be both strict and harsh. If you want to enjoy community amenities and extra services, a common interest community can be the right choice. If you want more control over your home and property, however, you may want to look at other options. It all depends on your preference, and what’s available in your area.

 

VA Loan Condominium Approval Procedures Part 1

Deciphering the VA Lender’s Handbook Chapter 16 Part 3

 

If you’ve been following this series, you may remember a couple articles ago when I mentioned that purchasing a condo with a VA loan can be annoying. The next few articles are going to make it abundantly clear what can make the purchase process annoying when working with a condo. This article, and the next couple articles following it are going to detail the process of getting a yet-to-be approved condo project approved by the VA. There are a lot of steps to the process, but thankfully not many of them need to be done by you; most are done by the lender or the VA and you just have to wait patiently while they are done.VA Condo Loans

 

The first step that needs to be taken is for the lender to provide a couple of things to the local VA office of jurisdiction. They need to provide a written request for VA-approval, and a copy of the condominium’s organizational documents. Those organizational documents are very important to the process because the organizational documents contain most of the information that might be problematic to VA approval. The VA office will review the organizational documents and make sure that they comply with VA title, lien, and other regulatory requirements. After the VA finished reviewing the documents, they will notify the lender of their decision, and the lender will notify you. This must take place before any units or lots in the project will be eligible for the VA guaranty.

 

This approval process can be expedited if the project or community has already been approved by the Department of Housing and Urban Development (HUD) or, oddly, the United States Department of Agriculture (USDA). Generally speaking, if the project has already been approved by HUD or the USDA, the VA will not need to conduct further review. When the VA receives evidence of approval of the property by HUD or the USDA, the VA office will usually just add the project to the VA’s nationwide list of approved projects without issuing a formal VA approval letter. This is not always the case, however. There are some rare cases where HUD or the USDA will approve a house and the VA will discover that it does not fit their requirements. In this case, the VA notifies the lender as soon as they can that the VA will not guarantee loans for units in the project.

 

The VA advises lenders to utilize an attorney’s opinion when dealing with a project that has not been approved by HUD, the USDA, or the VA. The attorney can advise the lender on how to proceed based on the VA Organizational Documentsorganizational documents. Aside from a project being approved by HUD or the USDA, there are a couple other ways to expedite the approval process. First, if the organizational documents for a condo project are virtually the same as a set that has already been approved for a different project, the lender should submit a certification from an attorney that states that they are virtually the same, specifically identifies the previous set, and describes any variations the set in question have from the previous set. Second, if a state agency has certified (or is willing to certify) that a condo project is in compliance with the laws of the state, then the lender can include that certification in the packet they send to the VA for approval.

 

After the VA finished reviewing all of the documentation that the Lender submitted, they will send written notice of their decision to the lender. The Handbook provides a table that shows the different possibilities of what the notice might say. It is shown below:

When… Then the notice will…
the project is approved indicate any special conditions/requirements which much be met prior to VA guaranty of an individual loan in the project, such as

  • recording of documents
  • pre-sale requirement, or
  • completing of common areas

Note: There is no formal VA approval letter for projects accepted by VA based on their approval by HUD or USDA.

there were

  • missing/incomplete documents
  • inaccurate/inconsistent information, or
  • correctable deviations from VA requirements
explain what further documentation is needed.
Note: VA will then suspend processing pending receipt of the needed information or material.
the project is unacceptable state the reason.
Note: When there are objectionable provisions related to unreasonably retained controls or rights of the declarant/developer, and it is difficult to amend the documents, VA may consider a separate recorded agreement from the declarant/developer relinquishing the objectionable provisions.

More VA Requirements For Common Interest Communities

Deciphering the VA Lender’s Handbook Chapter 16 Part 2

 

In the last article, we finished up by talking about the VA requirements for the title on properties that are in a common interest community such as a condominium or a planned unit development (PUD). We wrapped up the basic requirements for the title (sort of), but didn’t get started on the lien requirements. The VA’s title requirements can get complicated and difficult to understand, much the same way as the agreements and contracts that a common interest community may require. If you are both interested and courageous, you can check out VA regulations 38 CFR 36.4350, which has all the details of the title requirements that we talked about in the previous article. Alternatively, if you’re concerned about it, you can find an attorney that does free consultations, or just get started with a lender and have them explain it to you.

 

Lien requirements can also get complicated, but not usually as bad as the title requirements. Generally speaking, the VA requires that the VA loan be secured by the first lien on the property. We’ve talked about this in previous chapters, and even gone over the very few acceptable cases where the VA loan does not have to have the first lien on the property. If you want to learn what cases allow for a subordinate lien, you can look at VA regulations 38 CFR 36.4351 and 38 CFR 36.4351. Just throw those references into Google and the regulations from the VA should come right up. For the most part, though, all you need to know is that almost always the VA will require a first lien on the home, and that in a common interest community, any mandatory HOA lien or assessment is subordinate to the VA’s lien.

 

Appraising a property in a condo project is different from appraising a typical home. For you the process isn’t too much different, though you will receive a different appraisal report for your reference. If the property is a PUD, the appraiser will use Freddie Mac Form 70/Fannie Mae Form 1004, Uniform Residential Appraisal Report, just like for a standard home, but for a condo project, the appraiser must use Fannie Mae Form 1073, Individual Condominium Unit Appraisal Report. You should know that if there are any commercial or non-residential ownership interests in the condominium, the appraisal report will include that information and the interests’ impact on the value of the residential units. If you aren’t sure if the condo you’re interested in has a non-residential ownership interest, just call their office and ask.

 

As we mentioned in the Common Interest Communities, the burden of making sure that the common interest community’s title and lien agreements are acceptable to the VA falls on the lender’s shoulders. You should stay up-to-date as the lender makes sure that this is the case, because the Notice of Value that comes from the VA is conditioned upon the property’s title and lien agreements being acceptable to the VA. From the Handbook, “This property is located in a development with mandatory membership in a homeowners association. The lender is responsible for ensuring that title meets VA requirements for such property and that homeowner association assessments are subordinate to the VA-guaranteed mortgage.” This should all happen in the background, but a little extra vigilance on your part is never a bad thing.

 

The VA has essentially the same disclaimer on the Notice of Value for a condo project that has not yet been approved by the VA or which is in the process of making changes that will make it acceptable to the VA. They issue the Notice of Value and condition it upon the lender making sure that the property is acceptable to the VA’s requirements. Condos have a few more requirements that are regulatory in nature that we have not covered and are not going to bother covering, but they hit on things like a pre-sale requirement, warranty requirements, and the possibility for a required wood-destroying insect inspection. You can learn the details of these requirements for condos in 38 CFR 36.4360, or you can call us and ask!

 

Basic VA Requirements For Common Interest Communities

Condominiums, and Planned Unit Developments

Deciphering the VA Lender’s Handbook Chapter 16 Part 1

 

There are some special considerations for the VA when a borrower wants to purchase their home inside a condominium, a common interest community, or a planned unit development. Chapter 16 specifically covers these requirements and clarifies why many of them are in place. First, the VA defines a “common interest community” as “…a subdivision containing common land, often including recreational amenities. That common property is typically owned by an association of homeowners (HOA), to which they all must belong and pay lien-supported assessments for a proportionate share of the expenses of the HOA.” In other words, if there is any common property that is paid for by an organization that the residents are required to belong to and pay fees to, the VA will consider it a common interest community. Condo projects and planned unit developments (PUDs) are considered common interest communities by the VA.

Planned Community

To put it bluntly, condos can be annoying to purchase with a VA loan. They aren’t always, but they can be if the condo is not already on the list of VA-approved condominiums. A condo project will only be put on the VA’s approved list if it meets all of the VA requirements, but the VA isn’t proactively seeking out condo projects to add them to their list; a condo project is only added to the list is if a veteran borrower wishes to use their VA loan benefits to purchase a condo in the project and it’s not already approved. The VA will go through their process to determine whether the project is acceptable to them. PUDs are easier than condos because they don’t have to be approved by the VA before any veteran can purchase a property within it. The list of VA-approved projects can only be reached by a lender using TAS (The Appraisal System). If you are wondering whether a condo you’re interested in is VA-approved, you’ll need to work with a lender to find out.

 

You may wonder why the VA makes it more difficult to purchase a condo than a standard home or even a manufactured home. Well, you can rest assured that it’s not just because they want it to be difficult, and it’s not because they have a thing against condos or other common interest communities. The Handbook provides the following explanation: “VA’s goal is to help protect the interests of veterans and the Government by ensuring that all properties located in a common interest community meet VA regulatory requirements. Meeting this goal as efficiently and cost effectively as possible serves the best interests of all program participants involved.” In other words, the VA wants to make sure that the restrictions, liens, and other common interest community-related conditions put on a veteran are both normal and acceptable, and give the veteran enough control over their own property.

HOA Agreement

Even though condo projects are the only common interest community that must be approved directly by the VA beforehand, any properties that are being purchased with a VA loan must meet with the VA’s title and lien-related requirements. The lender is the party responsible for making sure that the community meets the VA’s requirements. While the VA does not have strict requirements for maintaining evidence of this compliance, the lenders are advised to heed the advice of their legal counsel, who will read the community contract or agreement and advise you and the lender what the contract says.

 

In order to be acceptable to the VA, the title to the estate must not be less than fee simple, except under certain circumstances. Ask your lender or an attorney if you are not sure what that means. Also, the title must not be subject to unreasonable restrictions to use and occupancy, except under certain circumstances, and certain minor title limitations will not be considered by the VA, to the extent described, as materially affecting the value of the property. We’re going to keep talking about the VA requirements in the next article, so if you’re looking for more information on this topic, it’s on its way! Also, feel free to give us a call to find out if the condo you’re interested in is approved by the VA.

 

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