Many senior borrowers eligible for reverse mortgages or about to become qualified and live in condominium projects have yet to learn of the surprises that may be waiting for them.  You may know neighbors who live in your project, currently have reverse mortgage financing, and have heard about how easy it was.

Unfortunately, changes in condominiums and HUD programs in the past few years have changed much of this.  If you live in a condominium, before you start making plans that include a reverse mortgage, you should know about the rules for condominium projects that have prevented many borrowers from obtaining a reverse mortgage.

HUD recently changed its program guidelines, making condominiums easier to use as security for a reverse mortgage.  However, it is still more challenging than a single-family detached residence.  You should know the issues from the start.

How do condo associations benefit from Reverse Mortgages?

We had shown that the sales prices of many projects increased when they opened the project to more potential buyers.  But sadly, some HOAs still confused HUD approval with Section 8 and low-income housing and have refused to cooperate, forcing their senior owners into decisions they were not ready to make

So, the shocking truth about reverse mortgages with condominiums is that even though you may not owe anything on your unit, and you may meet the age requirements, the inability to lend with a government-insured loan in your project or even the project manager may prevent you from being able to get a reverse mortgage.

We see more projects being declined than approved by about a 2 – 1 ratio.  This is something to remember if you plan to purchase with a reverse mortgage, considering the time constraints on most purchases and that a project approval can take eight weeks or longer (if it gets approved).

The last thing you want to do is place an offer on a condominium unit only to find that you have a deadline and cannot perform, must waive contingencies, and then find out that HUD will not approve the project through no fault of yours or your lender’s.  You want to avoid finding yourself in a situation where you risk losing your deposit or worse.

Finally, if you are looking at a reverse mortgage for your existing condominium and the project is not on the current HUD-approved list, check with your HOA to see if they have recently applied for approval as it might save you some time and expense, and remember the 7 most common reasons for project denial.  You can always look at the HUD condominium guide online at https://www.hud.gov/sites/documents/11-22MLGUIDE.PDF.  Still, I warn you about trying to be your own “condominium expert.”

Your best bet is always to look for a property already on the HUD-approved list but remember; this is not a 100% guarantee if something happened between the time HUD placed the project on the list and now you wish to purchase.  Leave yourself enough time to get the project documentation together, review it, and leave an out in the contract if the project status changes.

The association is involved in litigation other than foreclosure proceedings involving unit owners.  If so, HUD must review this issue at approval and may decline the project.

History of the HUD condo approval process

It all started when HUD published the Mortgagee Letter 2009-46.  By way of a bit of history, on August 1, 1996, HUD established the “Spot Approval” process for condominium projects, which also contained a 14-question “Suggested Checklist for Spot Loan Approvals” (Mortgagee Letter 96-41).  This allowed reverse mortgage lenders (and banks) to fund FHA loans in condominium projects not previously approved without having to get the entire project submitted for approval if the reverse mortgage lender was willing to make a relative few certifications.

HUD stipulated that they could not already have more than a concentration of insurance outstanding on loans on 10% or more of the units in the project (without having the entire project approved and then the 10% limitation removed).  Many borrowers could obtain forward and reverse mortgage loans insured by FHA on HUD programs in condominium projects with a minimal review, as most projects only approached the 10% maximum after obtaining HUD approval.

Mortgagee Letter 2009-46 eliminated the Spot Approval Process and established a 2-year recertification period for all projects already on the approved list.  All new loans had to follow the new guidelines for all borrowers who got their Case Numbers on or after December 7, 2009.  In other words, a project approval expired with this new process every 2 years, and the project had to go through a whole new project approval every two years.

That Mortgagee Letter established two ways to approve projects: the HRAP or DELRAP process (the difference being whether a delegated lender does the approval or HUD does).  HUD sought to allow lenders to approve projects with the DELRAP option while the HRAP would still be HUD receiving the documentation and approving the project.  The HRAP and DELRAP that HUD thought would be a system that would take a lot of the project approval of HUD and allow lenders to make some of the determinations did not meet this objective.  The lender became responsible for the project’s approval even when they were not necessarily the company closing other loans.  Lenders were unwilling to assume this risk.  The project packages went back to HUD for approval in almost all cases, and that is where it stands today – with HUD.

The project must be reviewed if it has not been approved within the past 2 years.  The issues preventing your project from being approved may be things you don’t know, wouldn’t have even thought about, and can’t readily see.  The lender must gather a complete list of project documentation for delivery to HUD for review.  The review and approval can take 6-8 weeks to complete once the package is submitted to HUD.  During the COVID-19 Pandemic, those timeframes often stretched longer.

Homeowners and others often need to find a way to search titles and see evidence of reverse mortgage loans in a project and assume that the project is approved.  At the same time, this might be true.  The fact that there are existing reverse mortgages in the project is no guarantee that the project is approved or will even meet current approval criteria.

We’ve had several borrowers tell us they were not worried about their project because they were sure it would be approved.  Their place and project were gorgeous and desirable and had great common amenities.  But the things that most often prevent a project from being approved have nothing to do with this.  HUD will conduct a budget review.  Suppose the reserves need to be more adequate in their estimation for ongoing operation.  In that case, maintenance of common amenities, etc., the project will not be approved.

Many new projects only need a little replacement of roofs and maintenance of the common areas, but they will eventually.

Condominium approval requirements

Suppose your dues need to place more money aside so it is available when these things need fixing and replacing.  There will be special assessments in that case, and the project could be in disrepair.  HUD requires that the project is solvent and has adequate money in reserves for capital expenditures and deferred maintenance repairs.  The money in a trust account for such items should equal at least 20% of the budget.

This would impair the marketability of the units over time.  Unless it’s for a minor issue that would be covered by the liability insurance anyway, HUD will generally not approve a project currently being sued (in litigation).  When applicable, hazard and liability insurance requirements and fidelity and flood insurance must be maintained at adequate levels.  We usually see that the projects carry sufficient hazard insurance but often find projects containing 20 units or more that fall short of the fidelity bond coverage.

This insurance would protect the unit owners if someone on the HOA Board or in an outside management company were to steal association funds.  HUD has a formula that they follow which takes into effect three months of the total monthly dues of all units plus the amount in reserves.

Other things borrowers may not even be aware of could prevent their project from being approved, including other homeowners who are delinquent on their HOA dues.  A maximum of 15% of the total units can be in arrears on their association dues of 30 days or more past due*. * HUD can review and grant a waiver to 20% if they feel it is warranted

Rule: Generally, no more than 50% of the units may be occupied by people other than the unit owners as their primary residences (that would include rental units and second homes), and HUD does not allow any one entity to own more than 10% of the units in any project unless there are less than 10 units in the case of 10 units or less.  HUD does allow for some exceptions, but if you know your project contains less than 50% primary owner-occupied residents, you should bring that to the attention of your loan originator so they can research up-front immediately to avoid unnecessary time and expenses.

HUD will review all pending litigation to determine its effect on the viability of the project or its finances.  Pending litigation can be the reason for a rejection of the project.

Maximum FHA concentration %

HUD will not exceed a 50% concentration in any project.  In other words, if they have already insured loans on half of the units in the project, they will not accept any additional risk in the project.

That means that even if your project meets all the condominium project approval requirements and is on the current HUD list, if HUD has existing Case Numbers issued or loans insured that equal 50% or more of the total units, no new Case Numbers shall be issued.  They may accept a small amount over 50% to accommodate some fall-out.  Still, once their tolerance is met, they will cease issuance of new Case Numbers, which would not allow lenders to begin processing a reverse mortgage (or any HUD/FHA insured loan) in the project).

This would be especially easy to hit in the case of smaller projects where just a few units could account for 50% of the entire project.  With projects of three or fewer units, one loan will fill the quota.  HUD would only be able to insure another loan once that loan is paid off since HUD will approve the insurance on loans in projects as small as 2 units.

HOA boards blocking approvals

Many Homeowner Associations are unable or unwilling to change any of the areas mentioned above.  This can be because of the approvals required from their boards, the unit owners, the costs involved, or, in some cases, the stigma they perceive about FHA-insured financing.  They don’t want HUD approval.

We have run into several Unit-Owner controlled boards who felt that having a HUD project approval would bring in less-qualified owners and thought that might hurt the appearance of their project.  (I did a quick search on the internet and found Reverse Mortgage Daily and the LA Times have reported similar stories)

Sometimes, we can show them that having HUD approval opened reverse mortgages to their senior owners.  Other times, we could show that adding the availability of FHA financing to well-qualified purchasers increased the marketability of the units.  We are not talking about small, insignificant units at these property values!  After all, the maximum lending limit for loans in 2024 is over $1,000,000 at $1,209,750.

6 Key Condo Approval Requirements

• Your fiscal year’s budget must reflect at least 10% of the standard assessment value deposited into reserves.
• No entity may own more than 10% of the units within any association if there are 10 units or more or a maximum of 1 unit if there are less than 10 units.  A condominium developer is exempt from this calculation if the association turnover has not occurred.
• A maximum of 15% of the unit owners may be more than 30 days behind on HOA dues.
• The owner-occupied ratio must be greater than 50% of the units.  Non-owner-occupied units that must stay below 50% of the total include rentals and 2nd homes that are not the owner’s primary residences.
• Your association and anyone who handles association funds (management companies included) must maintain Fidelity Bonding equal to three (3) months of standard assessments PLUS the sum of the current balances of all reserve accounts combined.
• No active special assessments, collections, associated work, or special assessments are planned within the next 2 fiscal years. 

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