You can get a reverse mortgage on your condo if the entire condominium project is FHA-approved. If the project is not approved by the FHA (Federal Housing Administration), you can follow some action steps to get it approved by the association.
The federal government regulates the reverse mortgage program that involves additional rule, unlike standard mortgages. Also known as, or Home Equity Conversion Mortgages (HECM), reverse mortgages enable homeowners age 62 or older to convert their home equity into cash.
However, while most properties are eligible, some are not, while for other property types, rules can be very hard. For those who reside in condominiums, getting a reverse loan can be challenging. To get a reverse mortgage for a condo, property and homeowners’ association may need to meet specific additional requirements.
Let’s take a look at the most common regulations applicable to condominiums. Also, learn some proven steps to work towards your reverse mortgage approval process.
What if your condo is not FHA approved?
In this case, you can ask the condo association or your lender to get the FHA approval.
FHA, a branch of the U.S. Department of Housing and Urban Development (HUD), insures reverse mortgages. Because of the involvement of the federal government, an entire condo project must apply to HUD for approval before residents can acquire FHA loans.
For approval, your Homeowners Association (HOA) must meet specific criteria before applying. The HOA has to provide relevant detail, such as the HOA’s financial statements, insurance information, number of units, the construction status, etc.
Are you eligible for a reverse mortgage On a Condo? (FHA Requirements for Condo)
The FHA has the following particular requirements that a condominium project must meet to secure approval for a reverse mortgage:
Restricted Commercial use
FHA-approved condominium projects must be primarily residential property. Any commercial usage, such as office space and grocery store, is limited to 25 percent of the total floor space.
At least 50 percent of the total condos must be owner-occupied or sold to owners who intend to live there.
The location of the property must be at a reasonable distance from a well-traveled road, an airport, a railroad, or a military airfield. There must not be any dump or landfill, and the site of the project should not have unstable soil.
Limited Individual ownership
One investor may own only ten percent of the total units in the condo project. The same applies to developers and builders, who may rent out unsold condo units. As per the FHA guidelines, the majority of condos should be owner-occupied.
The project must be mostly complete
It is the primary reason why most condo projects are not FHA approved. The FHA requires Housing units and common area structures to be complete. There’re exceptions for minor unfinished work, such as landscaping.
Developers or builders often do not complete in the project in the early development stage when the FHA approval would be most beneficial.
Homeowner’s Association Dues
No above 15 percent of the total condo units can be more than 60 days past due of their condominium association fee payments.
The FHA reviews the bylaws and covenants of the property. Provided documents must not contain language that gives the association “right of first refusal” for violating the Fair Housing Act. The FHA also wants to ensure that it doesn’t interfere with the mortgagee’s right to foreclose on a condominium unit.
The condotel condominium projects double as a resort-type property that buyers can rent out on a short-term basis to vacationers. The FHA prohibits this type of project.
There must be adequate reserves for the eventual replacement of structures, including sidewalks and roads. A review of the reserve should not be over 12 months old.
The same requirements apply if you want to ensure reverse mortgage non-borrowing spouse protection.
Common Problems with getting a Reverse Mortgage on Condo
As you see, under the current FHA policy, to obtain a reverse mortgage on a condominium, the entire complex has to get FHA approval. The approval process is complex and requires a lot of documentation.
Because of this, only about six percent of condominium projects are FHA approved, according to the Community Associations Institute.
David Hochberg, vice president on Team Hochberg at PERL Mortgage, said:
“Half of his HECM applicants own condos in non-FHA-approved communities. He said most people failed to secure a reverse mortgage because of this.”
Similarly, Philip Parziale, COO and general counsel of Mahwah, N.J.-based Nationwide Equities Corp.:
“Only because they reside in a condo, but in a single-family home, they cannot enjoy the benefits that other people can enjoy, which is not fair.”
Many lenders agree that reverse mortgage condo spot approval would fix many of these problems.
“Spot approvals will not only assist the condo owners waiting for HECMs, but it also could boost the lagging volume following last year’s HECM rules changes.”
Recommended Action Steps For FHA Approval
The first step is to determine if your condominium is FHA-approved. HUD keeps a database of all FHA-approved condominiums. On this publicly-accessible database, you can search for your condo by state, county, or even the name of the property. Remember that these steps are crucial if you want to borrow a reverse mortgage on a condo and want to enjoy a happy retirement.
If you notice that your condo project features a certificate of FHA approval in the past, it’s a sign that the association may consider FHA approval in the future. Open a discussion with your association and ask the member and find out if they are willing to allow reverse mortgage in the project.
You can also contact a lender, who can broach the subject to your HOA on your behalf to see it is feasible to do reverse mortgages in your project.
If you own an FHA-approved unit, consult with your mortgage loan officer to proceed.