Getting a Reverse Mortgage on a Condo Key Considerations

Because most reverse mortgages are FHA loans, they are harder to get on a condo.

The property must meet specific criteria set forth by the Federal Housing Administration (FHA), which insures reverse mortgages through the Home Equity Conversion Mortgage (HECM) program.

This program is the most popular type of reverse mortgage, and it’s regulated by the U.S. Department of Housing and Urban Development (HUD) and comes with sturdy borrower protections.

Condo owners who are over 62 should consider a reverse mortgage, because it can secure their retirement.

Eligibility criteria for a reverse mortgage on a condo

For a condo owner to be eligible for a reverse mortgage, both the individual and the condominium complex must meet specific criteria.

First, the homeowner must:

1. Be at least 62 years old
2. Live in the condo as their primary residence
3. Have enough equity in the property
4. Prove financial ability to pay property taxes, insurance, and HOA fees.

The condominium complex must also meet FHA guidelines, which include:

• The complex must be primarily residential, with at least 50% of the units owner-occupied
• No more than 10% of the units can be owned by a single investor
• Up to 10% of the units may have FHA loans on them
• The complex must be financially stable, with adequate reserves and a low delinquency rate on condo fees
• The complex must meet FHA property standards and flood zone requirements.
• The complex must have adequate insurance coverage, including hazard, flood, and liability insurance

Common pitfalls of reverse mortgage condos

There are several potential pitfalls to be aware of when pursuing a reverse mortgage on a condo.

The condo complex doesn’t meet FHA standards

One of the primary challenges is getting your condominium complex approved by the FHA. Many complexes do not meet the strict guidelines set forth by the agency, which can make it difficult for individual unit owners to obtain a reverse mortgage.

Your HOA won’t apply for FHA approval

Another common pitfall is the possibility of the HOA refusing to apply for FHA approval.

If the HOA is unwilling to provide necessary information or make required changes, the reverse mortgage process may come to a halt.

Checking your condo’s reverse mortgage eligibility

The FHA-approved condo list is a searchable database of condominium complexes that have been approved by the FHA for reverse mortgages.

The list can be accessed on the HUD website and searched by location, name, or status.

To use the FHA-approved condo list, follow these steps:

1. Visit the HUD website
2. Enter your search criteria, such as the city and state where the complex is located, the name of the complex, or the FHA approval status
3. Review the search results to determine if your complex is approved

If your complex is not listed, it may be necessary to apply for FHA approval before you can obtain a reverse mortgage.

FHA “spot approval” single unit approval for condos

In the past, the FHA offered a “spot approval” process, which allowed individual condo units to be approved for a reverse mortgage, even if the entire complex did not meet FHA guidelines.

While this particular process was discontinued in 2010, it was revived in 2019 under a different name.

A new FHA “single-unit approval” process

In 2019, the FHA introduced a new “single-unit approval” process. This allows individual condo units to be approved for FHA financing, even if the complex is not on the approved list.

This process is intended to provide greater flexibility for condo owners seeking a reverse mortgage, but it still requires the complex to meet certain criteria, such as adequate insurance coverage and financial stability.

To get a single-unit approval, your condo complex must:

• Have 5 or more units
• Must have had a certificate of occupancy more than 1 year ago
• Is not a condotel, timeshare, or other ineligible condo
• Meets standard rules for all condos

Basically, if a condo complex would qualify for FHA financing, you may be eligible for a single-unit approval.

Getting the condo complex approved yourself

If your condominium complex is not currently FHA-approved, you may consider taking steps to get the complex approved yourself.

This process can be time-consuming and may require the cooperation of your HOA, but it can ultimately increase the value of your property and make it easier for you and your neighbors to obtain financing.

To get your complex approved, follow these steps:

• Review the FHA guidelines to ensure your complex meets the eligibility criteria
• Gather the necessary documentation, such as financial statements, insurance policies, and property records
• Work with your HOA to address any deficiencies and ensure the complex meets FHA standards
• Submit the required documentation and application to the FHA for review
• Await the FHA’s decision, which may take several months

Alternatives to reverse mortgages for condo owners

If a reverse mortgage is not the right option for you, there are several alternatives to consider.

Home Equity Line of Credit (HELOC)

A HELOC enables you to borrow funds against the equity in your home, providing a line of credit that can be used for various expenses. This option typically has lower fees than a reverse mortgage, but it does require monthly payments. The condo does not have to be on an approved list to qualify for a HELOC.

Home Equity Loan

Similar to a HELOC, a home equity loan enables you to borrow against your home’s equity, but it provides a lump sum payment instead of a line of credit. This option also requires monthly payments and may have lower fees than a reverse mortgage.

Refinancing

If your original mortgage interest rate is higher than current market rates, you may consider refinancing to lower your monthly payment and free up cash flow.

Selling the condo and buying an approved condo or house

Selling your condo and moving to a property that is eligible for a reverse mortgage can free up equity and reduce your expenses. You can buy a home with a reverse mortgage and never have a payment.

Renting out your condo

If your HOA allows it, you may consider renting out your condo to generate additional income.

How to apply for a reverse mortgage for a condo

If you decide that a reverse mortgage is right for you, follow these steps to apply:

1. Determine if your condominium complex is FHA-approved by searching the FHA-approved condo list
2. Consult with a reverse mortgage counselor, who can help you assess your financial situation and determine if a reverse mortgage is appropriate for your needs
3. Find a reputable reverse mortgage lender that is knowledgeable about the unique requirements of reverse mortgage condos
4. Submit your application, along with the required documentation, such as tax returns, proof of income, and property records
5. Complete a financial assessment to ensure you can continue paying property taxes, insurance, and HOA fees
6. Await the lender’s decision

Pros and cons of reverse mortgage condos

Before pursuing a reverse mortgage on your condo, it is very important to weigh the pros and cons:

Pros:

• Provides access to your home’s equity without the need to sell or move
• It can supplement your retirement income, pay for unexpected expenses, or fund home improvements
• Loan repayment is deferred until you sell the property, move out, or pass away
• No monthly mortgage payments are required

Cons:

• The process can be more complicated and time-consuming than for single-family homes
• Your condominium complex must meet strict FHA guidelines
• Your HOA may not cooperate with getting the complex approved if it’s not already
• The loan balance increases over time, potentially reducing the equity available to your heirs

A reverse mortgage on a condo: tougher but possible

A reverse mortgage on a condo can be a valuable financial tool, but it requires careful planning and consideration of the unique challenges associated with condominium ownership.

By understanding the eligibility criteria, common pitfalls, and alternatives, you can make an informed decision about whether a reverse mortgage is the right option for you.