Selling Guide

Published June 02, 2021

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How is the minimum replacement reserve allocation for HOA budgets calculated?

When determining the eligibility of a condo project on the basis of a Full Review, lenders must review the HOA projected budget to determine that it

  • is adequate (i.e., it includes allocations for line items pertinent to the type of condo project), and
  • provides for the funding of replacement reserves for capital expenditures and deferred maintenance that is at least 10% of the budget.

To determine whether the association has a minimum annual budgeted replacement reserve allocation of 10%, the lender must divide the annual budgeted replacement reserve allocation by the association’s annual budgeted assessment income (which includes regular common expense fees).

The following types of income may be excluded from the reserve calculation:

  •  incidental income on which the project does not rely for ongoing operations, maintenance, or capital improvements;
  •  income collected for utilities that would typically be paid by individual unit owners, such as cable TV or Internet access;
  •  income allocated to reserve accounts; and
  •  special assessment income.

For additional information, see B4-2.2-02, Full Review Process.

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