Can I Get a Reverse Mortgage on a Condo?

A reverse mortgage allows homeowners to convert a portion of their home equity into cash. This financial tool is designed for individuals who have accumulated significant equity in their property and wish to access those funds without incurring new monthly mortgage payments. While commonly associated with single-family homes, reverse mortgages are also available for condominium properties, provided certain requirements are met.

Condominium Project Requirements

A condominium property must meet specific criteria to be eligible for a reverse mortgage, particularly a Home Equity Conversion Mortgage (HECM) insured by the Federal Housing Administration (FHA). The entire condominium project generally needs FHA approval, which ensures it meets standards for financial health, safety, and occupancy.

FHA approval can be obtained either through full project approval or single-unit approval. Full project approval involves the condominium association submitting detailed information to the FHA, leading to the project being listed on the FHA’s approved condominium search tool. To maintain FHA approval, a project requires:
At least 50% of units are owner-occupied.
No more than 35% of space is used for commercial purposes.
At least 10% of the association’s budget is held in cash reserves.
At least 85% of unit owners are current on HOA dues.
The project has no significant financial distress or pending litigation.

If a condominium project lacks full FHA approval, single-unit approval may be possible for an individual unit. This requires the unit to be in a development with at least five units and be completely built. The individual unit approval rule also stipulates that no more than 10% of units in a building can be FHA-insured, or if fewer than 10 units, no more than two units can hold FHA insurance.

The Homeowners Association (HOA) plays a significant role in maintaining a condominium’s eligibility for a reverse mortgage. The HOA’s financial stability, including reserve funding and delinquency rates, directly impacts the FHA’s assessment. They must also ensure adequate master insurance policies cover the property’s replacement cost.

Borrower Requirements

For a Home Equity Conversion Mortgage (HECM), the youngest borrower must be at least 62 years old. Some proprietary reverse mortgage products may have a lower minimum age, sometimes as young as 55.

The property must serve as the borrower’s primary residence. Borrowers must either own the home outright or possess substantial equity. If an existing mortgage balance remains, it must be paid off at the reverse mortgage closing, using the reverse mortgage proceeds or other funds.

Lenders conduct a financial assessment to ensure the borrower can meet ongoing property charges. This assessment evaluates credit history, property charge payment history, and residual income. Its purpose is to confirm the borrower’s capacity to continue paying property taxes, homeowners insurance premiums, and HOA fees, as failure to do so can lead to loan default.

Key Features of a Reverse Mortgage

The loan proceeds can be received in various ways, offering flexibility to meet diverse financial needs. Options include:
A lump-sum disbursement.
Fixed monthly payments for a set period or for as long as the borrower lives in the home.
A line of credit that can be drawn upon as needed.

Interest accrues on the outstanding loan balance, which grows over time as funds are received and interest is added. Unlike traditional mortgages, where interest is paid monthly, with a reverse mortgage, interest is deferred and added to the loan balance, meaning the amount owed increases over the life of the loan. Despite the growing loan balance, HECMs are non-recourse loans, meaning the borrower or their estate will never owe more than the home’s value at the time the loan becomes due, regardless of the loan balance.

The loan becomes due and payable when certain events occur, such as the borrower selling the home, moving out permanently, or passing away. If the heirs wish to retain the property, they must repay the loan balance, which is usually the lesser of the appraised value of the home or the amount owed.

Costs associated with a reverse mortgage include:
An origination fee, typically capped at $6,000 for HECMs, which can be paid from loan proceeds.
An initial mortgage insurance premium (MIP) at closing, generally 2% of the home’s appraised value or the HECM maximum claim amount, whichever is less.
An annual MIP of 0.5% of the outstanding loan balance.
Other closing costs, such as appraisal fees, title insurance, and recording fees.
Ongoing monthly servicing fees, which can be up to $35.

Applying for a Reverse Mortgage

The application process for a reverse mortgage begins with a mandatory counseling session conducted by a U.S. Department of Housing and Urban Development (HUD)-approved counseling agency. This session ensures potential borrowers fully understand the loan’s terms, financial implications, and available alternatives.

Following the counseling session, and once the borrower receives a certificate of completion, they can formally apply with a lender. The lender will collect personal information and documentation, including:
Photo identification.
Property tax bills.
Homeowners insurance policies.
An appraisal of the property is then ordered to determine its market value, a key factor in calculating the eligible loan amount. The appraiser also verifies that the home meets HUD’s minimum property standards for safety, security, and structural soundness.

Once the appraisal is complete and documents gathered, the loan enters the processing and underwriting phase. Underwriting involves evaluating the borrower’s eligibility and the property’s suitability. The underwriter verifies information on the borrower’s age, financial assessment, and property condition to ensure compliance.

Upon final approval from the underwriter, the loan moves to closing. At closing, the borrower signs the final loan documents, confirming acceptance of the terms, interest rate, and fees. A three-day right of rescission period typically follows the closing, during which the borrower can cancel the loan without penalty. After this rescission period, the funds are disbursed to the borrower according to the chosen payment option, completing the reverse mortgage process.