Condo owners have been largely shut out of getting reverse mortgages due to difficulties for homeowner’s associations to obtain Federal Housing Administration (FHA) financing. But that could change as FHA is currently planning updates to the way it certifies condos to allow residents access to FHA loan products, including reverse mortgages.
FHA is the government agency that insures the vast majority of the reverse mortgages found on the market today. These products, called Home Equity Conversion Mortgages (HECMs), allow homeowners age 62 and older to access a portion of their home equity, which they can choose to receive in either a single lump sum payment, monthly installments, or through a line of credit.
Rather than making payments each month toward the loan balance, as you would with a traditional mortgage, reverse mortgages do not require a monthly payment toward the loan balance. The amount of funds borrowers may be eligible to receive depends on several factors, including their appraised home value, current interest rates, and the age of the youngest borrower.
The loan proceeds received from a reverse mortgage are not subject to state or federal income taxes, and therefore are not considered as “income.” Rather, these proceeds are loan advances, since the reverse mortgage ultimately becomes due and payable when the borrower dies or otherwise permanently vacates the home.
Home types: condo challenges
Homeowners may be eligible for a reverse mortgage if they live in single-family homes, manufactured homes that meet FHA property requirements, as well as condominium projects. These condos, however, must be FHA-approved in order to allow residents the ability to access reverse mortgages.
Because FHA offers a low down payment of only 3.5% and more lenient lending standards for credit score and debt-to-income eligibility compared to other options, FHA loans are often a popular source of financing among first-time homebuyers. FHA is also the primary source for retirees who are looking to unlock their housing wealth with a reverse mortgage.
Not all condominium projects, however, can provide their residents with access to FHA mortgage financing. In order to do so, an entire condo complex has to obtain certification from FHA.
That means even if you do meet the borrower eligibility requirements for a reverse mortgage, you cannot obtain a HECM if your condo is not FHA-approved. In the past, FHA permitted what was called “spot approvals,” which allowed senior condo-dwellers to get a HECM reverse mortgage on an individual basis, without requiring the entire complex to become certified by FHA.
Earning FHA approval can be a lengthy and complex process for homeowners’ associations (HOAs) under the current certification rules, leading some HOAs to abandon the idea altogether. But this may soon begin to change with new rules that are currently being considered in the nation’s capital.
Last fall, FHA announced several changes that would make it easier for condos to earn recertification so they can continue providing FHA financing to their tenants. These proposed updates are currently awaiting review by the Office of Management and Budget, according to a speech given this year by Housing and Urban Development Secretary Julian Castro to the National Association of Realtors.
In its announcement of the proposed changes, FHA said it anticipates that these new provisions will increase the pool of condo projects eligible for FHA approval, thus increasing affordable housing options for homebuyers.
If you are interested in a reverse mortgage but were unable to obtain a HECM because your condo was not FHA-approved, there is still a chance that you may benefit from a reverse mortgage.