Reserve Funding

In the past several weeks as I have been speaking on the new HUD/FHA guidelines, many persons have asked me whether HUD/FHA will require the “straight line,” “cash flow” or some other methodology for determining percentage of reserve funding.  The short answer is, “we do not know.”

What we do know is that in order to obtain FHA certification for a condominium project, reserve funding must be at 60% for established projects, and 100% for new projects.  Also, a reserve study must have been conducted within the past 12 months.  [To review our previous postings on the new proposed HUD/FHA guidelines, type in FHA in the search window]

In attempting to answer the question on funding methodology, I first spoke with the HUD regional office in Santa Ana, California.  The regional manager stated he did not know how the new guidelines would be interpreted regarding this issue.  I then spoke with Reserve Study consultant Jim Talaga from Association Reserves, Inc., who referred me to an article his partner recently wrote on the subject.

To read an informative article on the difference between “straight line” and “cash flow” reserve funding analysis written by Robert Nordland from Association Reserves, click here.

We’ll find out in time whether HUD/FHA will mandate a particular type of reserve funding.  In the interim, as the experts at Association Reserves suggest, the use of a particular funding method does not dictate a particular result.  What’s most important is funding results.  Thus “cash flow” or straight line?” is the wrong question to ask. It is much more informative to ask if the association is pursuing a conservative ““Fully Funded” objective, an aggressive “Baseline Funded” objective, or a “Threshold Funding” level somewhere in-between.  Whatever methodology is used, HUD/FHA will insist on either a 60% or 100% funded number to qualify for FHA certification.

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