New FHA Condo Rules Make Reverse Mortgages More Accessible
The federal government recently updated policies that impact the eligibility of condominiums for reverse mortgages. This followed an outcry from lawmakers and various mortgage industry groups. But while the policy change is meant to ease rules, critics argue much more needs to be done, especially for condo residents looking to obtain reverse mortgages.
In November, the Federal Housing Administration (FHA) published new guidelines. These guidelines are intended to increase the number of condominium projects that can be eligible for FHA insurance. The updates included a new streamlined condo recertification process.
Under these new recertification guidelines, FHA condo approvals expire two years from the date of placement on FHA’s list of approved condominiums. After that, condos must be recertified by the federal agency if they wish to continue offering FHA financing.
FHA insures mortgages for single-family homes, condominiums, conventional loans, jumbo loans, VA loans as well as reverse mortgages via the Home Equity Conversion Mortgage program. Because FHA offers loans with lower down payments (some as low as 3.5%) and flexible credit score eligibility, financing is attractive to many middle-income and first-time homebuyers.
FHA financing is also very attractive to senior homeowners who want to increase their cash flow during retirement through the use of a reverse mortgage.
Home Equity Conversion Mortgages
Home Equity Conversion Mortgages (HECMs) represent more than 90% of total reverse mortgages in the market, according to the Department of Housing and Urban Development, the parent agency of the FHA.
HECMs allow homeowners age 62 and older to unlock the equity in their home by converting it into tax-free funds that can be used at the borrower’s own discretion. A reverse mortgage is not like a traditional “forward” mortgage that requires you to make monthly payments toward the ownership of your home. Instead, with a reverse mortgage you are borrowing against your home equity to receive payment(s) from your lender.
Reverse mortgage borrowers are not required to pay back the loan until the home is sold or otherwise vacated. As long as the borrower lives in the home, he/she is not required to make monthly payments to a lender.
Although reverse mortgage borrowers aren’t required to make monthly payments to a lender, they must remain current on property taxes and homeowner’s insurance. Being delinquent on such payments triggers the reverse mortgage to become due and payable.
To become eligible for reverse mortgage, seniors age 62 or older must either own their home outright, or have a mortgage balance that can be paid down at loan closing. Generally speaking the mortgage balance should be around 50% or less than the home’s value.
Homes must also meet certain FHA approvals to be eligible for a HECM. That means single-family homes, certain manufactured homes as well as HUD-approved condominium projects.
Though condos represented just 2.8% of FHA loan volume through August this year, they are still viable dwellings for homeowners to obtain a reverse mortgage. But getting a HECM on a condo has become more challenging in recent years—even with the recent policy updates from FHA.
All sizzle, no steak
The new condominium rules, however, mostly address recertification after a condo association has already obtained FHA approval, leaving the initial certification process unchanged.
As the rule stands today, before a condo-dwelling homeowner can obtain a reverse mortgage, his/her entire condominium project must be approved by FHA. But, the requirements needed to receive complex-wide approval can be a burdensome process for many condo associations who don’t think it’s worth the procedural headache.
“One of the frustrating issues for seniors is their association board members are not willing to go through the certification process, even if the homeowner is willing to pay for condo consulting services to get the HECM loan done to where it’s not costing the condo association money,” said Mike Jacobus, client relations manager at FHA Condo Consulting, LLC, a Seattle-based company that works with condo associations and helps them navigate the approval process.
In the past, prior to the economic recession, FHA permitted what was known as “spot approvals,” which would allow a single unit within a condo building to get approved for a HECM, without requiring the entire complex to undergo the FHA certification process. This was more of an expedited process, Jacobus said, unlike the current certification requirements.
Critics of the FHA have argued that the reforms aren’t enough, insofar as they don’t address the key reasons why so many condo associations are no longer certified and why many first-time homebuyers have been shut out of receiving FHA insurance.
“Condominiums are often the most affordable homeownership option for first-time buyers, small families, single people, urban residents, and older Americans,” said Chris Polychron, president of the National Association of Realtors. “Unfortunately, current FHA regulations prevent buyers from purchasing condominiums, harm homeowners who need to sell their condominiums, and limit the ability of condominium projects to attract resident buyers.”
Christopher L. Gardner, a managing member of the consulting firm FHA Pros, a company that assists homeowner associations with navigating certification rules, told The Washington Post that the changes laid forth by FHA amount to “a lot of sizzle and little steak.”
While it might be challenging to convince condo association to undergo the FHA certification process, there are a number of approved condominiums nationwide where residents may take advantage of FHA’s loan programs. To find an FHA-approved condo project in your area, visit the Department of Housing and Urban Development’s database on eligible condominiums.