If you are looking to take out an FHA reverse mortgage (HECM) against your condo or are looking to buy a retirement or vacation condo using an FHA reverse mortgage purchase loan, it’s important to know that the rules are completely different from fee simple properties (where you own the land in addition to the building). The entire condo complex must be approved by the Department of Housing & Urban Development (HUD) before your loan can be processed or the condo must be eligible for single unit approval.
You might ask why, and there is a pretty simple explanation. The marketability of an individual condo unit is heavily dependent on the health of the complex, financial and otherwise. Say, for example, that one investor owns 25% of the units and files for bankruptcy. If all of those units hit the market at the same time, the property values would be adversely impacted. Many condo complexes are not financially prepared for future capital expenditures, which puts all of the unit owners in a precarious position and makes lenders nervous.
FHA-Approved Condos & Site Condos
The HUD condo list is public information and readily available for you to view. Use this link to the HUD condominium page, type in your zip code, and hit send. If you don’t see your complex listed, then your condo is not currently approved. If it is listed, look under the status column to see if it is approved or rejected (while also noting the expiration date). If expired, the complex will have to go through the approval process with HUD.
If you have a free standing condo home or don’t share a ceiling or floor with another unit, your home might be considered a site condo and not need to be FHA-approved. You have to be responsible for all maintenance of the unit (interior & exterior) and be completely responsible for insuring it. Very few condos are set up in this way to be eligible for site condo approval.
Proprietary Reverse Mortgage Condo Requirements
Proprietary reverse mortgages do not have government involvement, so the lender and investor can create their own condominium guidelines. Most lenders have copied FHA guidelines on condos over to their product, but there are exceptions to that. Often you will see a minimum condo value needed to qualify. It is worth inquiring about as some lenders do have easier guidelines to qualify than FHA.
FHA Full Project Approval Requirements
The full project approval process requires the HOA or management company to be willing to supply a substantial amount of documents on the condo complex and fill out a questionnaire. Our company can assist with the gathering, stacking, and submitting of documents to the correct HUD homeownership center for approval. Once submitted HUD is required to review the package within 30 days and provide a list of anything that is missing or needs correction.
The full project approval process allows for a complex to be approved for a period of three years. Before the three-year period is up a complex can recertify to continue their approval. Below are some of the main reasons that a complex might be declined.
- Not contributing 10% of total annual revenue to reserves and/or not having substantial reserves
- Leasing or sale guidelines aren’t HUD compliant
- Pending litigation or special assessments that will greatly affect marketability
- Insurance issues (hazard, fidelity, flood)
- Not 50% owner occupied or one investor owns > 10% of the units
- Too many units are in arrears on HOA dues
Single-Unit Approval Process
The single unit approval process is an option that is designed to speed things up, and take some of the power away from an association or management company, but nearly all the same documents and rules apply, so it is limited in it’s effectiveness. Many associations host their documents on a website where they can be purchased, but the financials, and in particular, a recent balance sheet, can be hard to come by. Given that the documentation is nearly the same, we recommend full project approval unless an association is opposed.
Another highlight of the single unit approval process is that any borrower who fails the credit qualification, and is subject to a tax & insurance escrow, is not eligible. Those borrowers can only get a reverse mortgage on their condo via the full project approval process. The process is also only available to buildings or complexes with five units or more. If a complex has been rejected in the past, it is not eligible for single unit approval.
Steps to Take for Approval
The application to HUD can be handled by Premier Reverse Mortgage for no fee, but we will need your homeowner’s association or management company to be willing to participate. We do not charge a fee with the expectation that you will use us for a reverse mortgage after the approval is complete. Most reverse mortgage companies are going to charge a fee to assist with the process or refer you out to a for-profit company set-up for this sole purpose.
One of the biggest challenges that we run into on a regular basis is the lack of desire and sense of urgency from a homeowner’s association, often due to misinformation about reverse mortgage condo rules. At the present time, it’s hard to complete the 30-60 day approval process with HUD without having a willing contact at the HOA or management company. The main reason is that we need a balance sheet that is less than 90-days old and some other information that most residents won’t have access to.
If your HOA is willing to proceed, then it is best to put them in touch with us to begin collecting the required documentation. We can assist them with certain items that are more challenging than others and answer any questions they have. We’ll also be the main point of contact with HUD on the approval as we understand their methodology from past experience.
Association is Reluctant or Was Rejected
Unfortunately, there is not a current workaround if your complex was rejected for a reason that cannot be remedied. We can usually look up the reason why your complex was rejected, and discuss that with you. There are many instances of a complex being rejected that need to make an easy correction to get approved, such as simply missing a required document in the original submission. It is often ignored because HUD uses the term rejected vs. pending or more information needed.
If your HOA is not willing to proceed with the application, you might be able to get all the documentation we need for approval. It would be best to contact us directly for the list of items needed to proceed. We will help you out as much as possible.
Future Changes Expected?
Based on our expectations, no, HUD does not have an interest in loosening up its condo guidelines. They were burned badly during the subprime fiasco and news of Florida condos having structural issues does not help either. If you have a neighbor who took out a reverse mortgage against their condo without having to jump through all the hoops, it’s because they took one out prior to the rule change in February 2010. Prior to that date, one could get their individual condo unit approved for an FHA loan with very little paperwork and just a little help from their HOA. It was called the “spot approval” process.
For those of you that are stuck with a condo association that will not cooperate or a complex that does not meet the current approval criteria, how are you staying up to date on what is happening? We put out an email newsletter once per month that will update you on any information we are hearing about the reverse mortgage condo process changing. You will not be sent emails more frequently than that. Our suggestion is to sign up for the newsletter on our home page, so you can keep abreast of these potential changes.
We are hopeful that one day leadership at HUD will make the condo approval process much easier to navigate. If you have any questions please don’t hesitate to contact us.