Reverse mortgages aren’t your average, everyday loan. Unlike typical mortgages and other home equity loans, reverse mortgages are heavily regulated and involve many additional rules that you may not be aware of. For those living in condominiums, getting a reverse mortgage isn’t as simple as it is for most homeowners. If you live in a condominium, you will need to meet specific requirements and fulfill unique application procedures before acquiring a reverse mortgage. Let’s take a closer look at many of the most common regulations applicable to condominiums.
Government-backed reverse mortgages (known as Home Equity Conversion Mortgages) are heavily regulated by the federal government. Specifically, the Federal Housing Administration (FHA), which is a branch of the U.S. Department of Housing and Urban Development (HUD), insures these loans.
Because of government involvement, an entire condo project needs to apply to HUD and receive approval before buyers or existing residents can acquire FHA loans. In order to get approval, your Homeowners Association (HOA) must meet a checklist of criteria that they will have to abide by before submitting an application.
When submitting an application, the HOA must include relevant details and characteristics of the project. Important details include the HOA’s financial statements, insurance information, the total number of units, any pending or ongoing construction phases, and other pertinent items.
Taking Your First Steps Toward Approval
To determine whether or not your condo is FHA-approved, there are several steps you can take. Because HUD keeps a publicly accessible database of all FHA-approved condominiums, you can search for your condo by state, county, city, or even the name of the project itself. Even if it hasn’t been approved, prospective borrowers may find that their condo project was approved in the past. This may indicate that the association will consider pursuing certification in the future.
Open a discussion with your HOA and ask other members of your community how they feel about reverse mortgages. If you contact a lender, sometimes that lender will be willing to introduce the subject to your HOA and find out whether or not it would be feasible to allow reverse mortgages in the project. However, depending on how HUD moves forward in 2017, you may not need to go through the hassle of getting your entire condo project approved.
Here are just a few of HUD’s most basic requirements. While there are many more guidelines and restrictions, some of which are regularly changed, these are a few of the more likely issues that your HOA may face when trying to get approval for the project.
- The condominium project must contain at least two dwelling units and must be primarily residential in nature.
- At least 75% of the property’s total floor area in projects or units must be used for residential space rather than commercial purposes.
- At max, a single investor or entity may only own 10% of units.
- No more than 15% of all units may be more than 60 days past due on condominium association fees.
- At least 35% of a project’s units must be occupied by their owners (this is a new proposal issued in 2016).
The Return of Spot Approval?
In the past, the FHA allowed borrowers in individual condo units to acquire reverse mortgages through the “spot-approval” or “single-unit approval” process. Just a few months ago, the FHA announced that it might bring back this process. Compared to current methods, the old “spot approval” procedure had less burdensome requirements and enabled many seniors to get the reverse mortgages they wanted.
Because extensive documentation must be submitted and the fulfillment of other requirements is necessary to approve an entire condo project, it can cost hundreds of dollars and irksome paperwork for many HOAs. If this change goes through and single units are able to be approved, it may become much easier for prospective borrowers to acquire a HECM. Keep an eye out for FHA updates in the coming months.