On the A-paper wholesale level (which is pretty much all that's left) the answer is that an HOA in litigation will almost certainly pull the transaction to a grinding halt.  Lenders treat risk like it is poison and if the governing board of their collateral is a vexatious litigant, or worse yet, is a popular target for lawsuit-happy homeowners, then it is an undertaking that most underwriters will pass on.  Through some research, we know that even the very few lenders that do consider lending despite HOA litigation will do so upon close examination of the type of litigation involved, the amount of potential loss and the nature of the dispute.  Lenders will understandably be more concerned with disputes about the structure, construction and/or lack thereof, so the water leaks in this situation will certainly stop any purchase or refinance transaction in its tracks .  The fact that the HOA is a plaintiff has less bearing than what you might think.  Just because they are seeking damages does not preclude a countersuit by the defendant or a subrogating third party who is involved in the same action. 

In each and every loan transaction involving condominiums, the lender will require the HOA to fill out and sign a condo questionnaire which includes a question about whether the HOA is involved in litigation.  A “Yes” response will sometimes result in an immediate underwriting decline, whereas in other cases, further explanation will be required.