Can You Get a Reverse Mortgage on a Townhouse?

A reverse mortgage is a financial tool that allows homeowners to convert a portion of their home equity into cash without the need for monthly mortgage payments. This type of loan is distinct from a traditional mortgage, as the borrowed amount, along with accrued interest and fees, becomes due when the borrower no longer lives in the home, sells it, or passes away. Many individuals inquire whether a reverse mortgage can be obtained on a townhouse, and the answer is generally yes, provided specific criteria are met.

General Eligibility for Reverse Mortgages

To qualify for a reverse mortgage, especially a Home Equity Conversion Mortgage (HECM) insured by the Federal Housing Administration (FHA), certain requirements apply. At least one borrower must be 62 years of age or older. While HECMs have this age minimum, some proprietary programs from private lenders may allow borrowers as young as 55, though these typically have different terms and are not federally insured.

The property must be the borrower’s primary residence. Vacation homes, investment properties, or second homes are not eligible. Borrowers must either own their home outright or have substantial equity. While no official minimum equity percentage is set by the government, industry guidelines often suggest at least 50% equity, enough to pay off any existing mortgage and closing costs with the reverse mortgage proceeds.

A mandatory step involves attending a counseling session with a Housing and Urban Development (HUD)-approved reverse mortgage counselor. This counseling ensures prospective borrowers understand the loan’s features, costs, implications, and alternatives. All individuals listed on the home’s deed are typically required to participate.

Specific Property Requirements for Townhouses

Townhouses are generally eligible for reverse mortgages, but for FHA-insured HECMs, they often fall under similar regulatory requirements as condominiums. This means the individual townhouse unit must meet property standards, and the entire development may need FHA or HUD approval. This approval process ensures the development adheres to specific FHA guidelines regarding its financial health, construction, and legal structure.

Homeowners Associations (HOAs) play a significant role in townhouse eligibility. The HOA’s financial stability and management practices are evaluated, as a healthy HOA ensures proper maintenance of common areas and overall property integrity. Lenders assess factors like the HOA’s budget, reserve funds, and any pending litigation. Borrowers remain responsible for paying property taxes, homeowners insurance, and HOA fees even after obtaining a reverse mortgage.

The ownership structure of a townhouse, typically involving individual unit ownership combined with shared common areas, is a key consideration. The property must be in good condition. If it does not meet HUD’s minimum property requirements, necessary repairs may need to be completed before closing. These requirements ensure the dwelling is safe and habitable, especially for attached residences with shared walls and common elements.

Gathering Information for a Reverse Mortgage Application

Preparing for a reverse mortgage application involves collecting various documents and financial information. Prospective borrowers will need to provide proof of age, typically a driver’s license or state-issued ID, and their Social Security card. Financial details required include recent bank statements, income statements (e.g., Social Security awards letters, pension statements, W-2s, or tax returns if self-employed), and homeowner’s insurance policy details.

Property-specific documents are also essential. These include the current deed or title, recent property tax statements, and if applicable, current mortgage statements or proof of mortgage satisfaction. For townhouses, HOA documentation, such as financial statements and covenants, conditions, and restrictions (CC&Rs), will be necessary. Organizing these documents beforehand can streamline the application process.

The mandatory reverse mortgage counseling session is also a source of crucial information. During this session, a HUD-approved counselor discusses loan terms, costs, potential impact on other benefits, alternatives, and the borrower’s ongoing obligations like paying property taxes and insurance. Borrowers are encouraged to prepare questions to make the most of the session.

Submitting and Closing a Reverse Mortgage

Once mandatory counseling is complete, the formal reverse mortgage application can be submitted to a lender. The application package generally includes personal identification, proof of homeownership, and financial information. Borrowers indicate how they wish to receive loan proceeds: as a lump sum, monthly payments, a line of credit, or a combination.

Following application submission, an appraisal of the townhouse is ordered to determine its current market value. The appraiser evaluates the property’s condition, size, and other features. The loan then moves into underwriting, where a review of the borrower’s financial assessment, property eligibility, and all submitted documentation occurs. The underwriter verifies requirements and may request additional documentation.

Upon final approval from underwriting, the loan reaches closing. This involves signing legal documents, including the loan agreement and deed of trust, often with a title agent or attorney. Closing costs, which are usually financed into the loan, include fees for origination, title insurance, and the initial mortgage insurance premium (MIP). After closing, a three-day right of rescission applies, after which funds are disbursed. The entire process, from application to funding, generally takes about 30 to 45 days.