Can You Get a Reverse Mortgage on a Condo? Here’s What You Need to Know
Reverse mortgages enable you to convert your home equity into cash, but while most homes are eligible, some are not. If you live in a condominium, your property and homeowners’ association may need to meet certain additional requirements in order for you to get a reverse mortgage. While not all condos are eligible, there may be some steps you can take to work toward approval.
Are condos eligible for a reverse mortgage?
Reverse mortgages allow homeowners age 62 and older to access a portion of their home equity, using the non-taxable proceeds they receive from the loan however they wish. About 90% of the reverse mortgages on the market today are loans insured by the Federal Housing Administration (FHA) called Home Equity Conversion Mortgages (HECMs).
While no monthly mortgage payment is required with a reverse mortgage, borrowers are still responsible for remaining current on their homeowner’s insurance, property taxes and, if applicable, condo association dues. Borrowers who fail to pay these critical fees risk defaulting on the loan and foreclosure.
FHA, which is a branch of the U.S. Department of Housing and Urban Development (HUD), insures reverse mortgages on single-family homes, as well as manufactured homes and condominiums that meet certain FHA requirements.
Since a HECM is an FHA loan, an entire condo project must apply to HUD and be granted approval before a buyer can purchase a unit with an FHA loan or before an existing resident can refinance into an FHA loan within the Homeowners Association (HOA).
FHA condo guidelines
For a condo project to become approved, there is a checklist of criteria HOAs will have to abide by if they want to submit an application to HUD.
Financial statements of the HOA, as well as the association’s insurance info, along with other information regarding the physical characteristics of the condo project such as number of units and pending construction phases (if any), are just a few things that will be considered during the approval process.
“Essentially, HUD wants to financially underwrite the HOA in efforts to mitigate potential bad loans,” says Mike Jacobus, client relations manager of FHA Condo Consulting, LLC, a Seattle-based firm that works with condo associations seeking FHA certification.
Though the guidelines for condos to become eligible for FHA approval span a 95-page HUD Condominium Project Approval and Processing Guide, here are some of the basic requirements for HOAs before they can allow FHA loans:
- The condominium project must be primarily residential, contain at least two dwelling units.
- No more than 25% of the property’s total floor area in a project or unit can be used for non-residential or commercial purposes.
- No more than 10% of the units may be owned by one investor or entity.
- No more than 15% of the total units can be more than 60 days past due of their condominium association fee payments.
- At least 50% of the units of a project must be owner-occupied.
It can be difficult to navigate the HUD certification process on your own as there are often pages and pages of documentation to sift through, but luckily there are several resources you can use to help you on your way.
The first steps
If you live in a condo and are considering the prospect of getting a reverse mortgage, there are several first steps you can take to see if your condominium is FHA-approved.
HUD keeps a database of all the FHA-approved condominiums that the public can access at any time. You can search for your condo by state, county, city and even by the name of your community to see if your association has FHA approval, or if it has ever been approved in the past.
Even if you log in and find out that your condo has received approval in the past, but it is now expired, that at least can give you an idea that your association may be open to possibly allowing FHA programs in the future.
“Each condo project is going to have different dynamics,” says Brian Cook, a mortgage advisor and reverse mortgage specialist with Alpine Mortgage Planning. “But it begins with opening up a discussion with the HOA to find out if they’d be willing to allow reverse mortgages.”
You can initiate a dialogue on reverse mortgages by broaching the subject at your next HOA meeting to see how others in your building feel about them, and to gauge your association’s willingness to pursue certification from HUD to allow FHA loans within the complex.
You can even contact a lender, who can then broach the subject of reverse mortgages to your HOA for you to see if it is feasible to do reverse mortgages in your project.
“I recommend that borrowers contact a lender, or find out themselves if their condo is FHA approved, then inquire with the HOA if they’re willing to get approved,” Cook says.