So you have made the move to buy a home and have met with a realtor and have been "pre-approved" by a lender. Now you are out shopping for a home and come across a Condo that suits your needs and want to make an offer. WAIT. The first thing you need to have your agent do is call the listing agent and confirm that the Homeowner's Association (HOA) is not in any pending or current litigation. If they are, confirm what the issues are.
Many prospective buyers have written offers, started their investigations and even paid for appraisal reports before they realize that the HOA is in the midst of litigation. HOA's in litigation represent risk for lenders in as much as lawsuits can effect the liquidity of a Homeowner's Association. When all the money of the HOA is drained in legal expenses, the HOA looses the ability to maintain the proper funds required for maintenance and insurance.
Some examples of HOA litigation that would be acceptable would be: HOA dealing with noise violations within a particular unit, HOA dealing with a property condition violation (IE: property is dirty or needs paint). These situations are easily explained and don't usually have problems in underwriting.
Where HOA Litigation becomes a problem is when HOA's are involved in litigation regarding construction defects. There is only one exception allowable to this in general guideline requirements and that is when the project is already fully repaired and the HOA is seeking reimbursement and is being represented by their insurance company. Wow that is a strict policy and I have yet to find a situation that would work in that manner. All the rest have had to be turned away for one reason or another. I do wish the GSE's would loosen this up again!
In any case, be sure to have your agent confirm that the HOA is not in any pending litigation or current litigation before moving forward with a purchase offer. Listing agents should be indicating this litigation in the listing notes when applicable.