Reverse mortgage guidelines on condos have become more flexible than they used to be, opening up this financial vehicle as a possibility to more homeowners than ever before. To be eligible for a home equity conversion mortgage, or HECM, a condo needs to be FHA-approved. Here’s how to determine if your condo is eligible and what you can do if it isn’t.
Condo Eligibility for a Reverse Mortgage
To find out if your condo is eligible for a reverse mortgage, enter the condominium’s name, location, or status on the Housing and Urban Development (HUD) website. If the condo project is FHA-approved, you’re good to continue with your reverse mortgage application.
Appraisal Requirements for Authorized Condos
As with any reverse mortgage application, even approved condos will also need to meet FHA appraisal requirements. As a part of the loan application process, an appraiser will visit the condo to determine the property’s value and inspect it for health and safety requirements. The condo must meet the following safety standards:
- The condo must have adequate electricity, heating, and running water.
- There must be roofing, as well as a bathroom.
- The condo must be structurally sound and not have any safety hazards.
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Getting Condos FHA-Approved
It is not uncommon to find that condos are not FHA-approved. In those situations, a borrower can independently seek FHA approval for a condo project.
There are two options to obtain FHA approval. A borrower can approach their homeowner’s association (HOA) to inquire if they will seek FHA approval for the whole complex. Alternatively, the borrower can obtain an FHA single-unit approval.
Requirements for FHA Approval of a Condominium
If several condo owners are interested in seeking reverse mortgages, the HOA may be more likely to pursue FHA approval. The HOA will spend at least $700 to $900 to get approval, and there isn’t necessarily a guarantee the condo project will eventually be FHA-approved.
The updated requirements a condo project must meet to get FHA approval are as follows:
- There must be at least two dwelling units in the condo project.
- The condo project must be primarily residential.
- At least 50% of the units must be owner-occupied.
- A single investor may own no more than 10% of the units.
- The condo project must permit leasing.
- There cannot be a requirement that a unit must be owner-occupied for one year before it is leased (typically called a seasoning clause).
- No more than 15% of the total units can be 60 days past due on their HOA fees.
- The total floor plan may be used for a maximum of 35% for commercial purposes.
- At least 10% of the HOA budget must fund a savings account.
- A maximum of 50% of units in a condo project may be FHA-insured.
Requirements for Single Unit Condo Approval
Even if several condo owners want to obtain FHA approval, the HOA needs to put time, effort, and money into the application, and some HOAs decline to pursue the process. If the HOA doesn’t want to do the work to get approval, it may be easier for a borrower to pursue a single unit approval (called a “spot approval” prior to the 2019 legislation).
Borrowers may receive FHA approval for a single unit even if the entire condo project isn’t FHA-approved.
Borrowers must show the following for single-unit approval:
- Construction on the condo must be complete.
- In projects with more than ten units, no more than 10% are FHA-insured.
- In projects with less than ten units, no more than two units are FHA-insured.
Which Condo Owners are Eligible for a Reverse Mortgage?
Condo owners with approved units must meet the same criteria for eligibility as any other reverse mortgage borrower. Once you’ve established your condo’s eligibility, you can begin the application process. The first step will be a reverse mortgage counseling session.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
