Many senior borrowers who are eligible for reverse mortgages or are about to become eligible and who live in condominium projects have no idea of the surprises that may be waiting for them. You may know neighbors who live in your project who currently have reverse mortgage financing and hear about how easy it was. Unfortunately, changes have taken place about condominiums and HUD programs in the past few years that 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 being able to obtain a reverse mortgage.
It all started when HUD published Mortgagee Letter 2009-46
By way of a little 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 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 also could not already have more than a 10% concentration in the project.
Many borrowers were able to obtain both forward and reverse mortgage loans in condominium projects with just a very minimal review. 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.
The 2-year period is now over for all projects approved prior to the changes on December 7, 2009 so now all projects that were approved must be recertified. All new projects have had to go through either the HRAP or DELRAP process as outlined in the 2009 letter (the difference being whether a delegated lender does the approval or HUD does) since December 7, 2009.
This could mean that some borrowers in the project have a reverse mortgage that they received prior to this time, but that does not necessarily mean the project automatically meets the current recertification criteria. If the project has not gone through a complete approval within the past 2 years, it must be reviewed and the issues that may prevent your project from being approved may be things that you don’t know, wouldn’t have even thought about and can’t readily see.
We’ve had several borrowers even tell us they were not worried about their project, they were sure it would be approved. The place was gorgeous, it was in a desirable location and had great common amenities. But the things that most often prevent a project from being approved have nothing to do with any of this. HUD will conduct a budget review and if the reserves are not adequate in their estimation for ongoing operation, maintenance of common amenities, etc., the project would not be approved. Many new projects especially don’t need a lot of replacement of roofs and maintenance of the common areas, but they will eventually.
Condominium Approval Requirements
If your dues do not place enough money aside so it is available when these things do need to be fixed and replaced, then there will need to be special assessments and the project could go into disrepair. 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).
Insurance requirements must be maintained at adequate levels for hazard and liability insurance and fidelity and flood insurance when applicable. We usually see that the projects carry the adequate amount of hazard insurance but often find projects containing 20 units or more that fall short on the fidelity bond coverage. This is insurance that protects 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 of which borrowers may not even be aware but could prevent their project from being approved include other homeowners who are more than 30 days delinquent on their HOA dues (can’t exceed 15% of the total unit owners), more than 50% of the units are not occupied by 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.
Maximum Concentration %
Something else that has only caught a few people by surprise, but it has happened is that HUD also only allows a 30% concentration in any project. What that means is that even if your project does meet all the condominium project approval requirements and is on the current HUD list, if HUD has existing Case Numbers issued or loans insured that equals 30% or more of the total units, no new Case Numbers shall be issued. This would be especially easy to hit in the case of smaller projects where just a few units could account for 30% of the entire project. With projects of three or fewer units, one loan will fill the quota and HUD would not be able to insure another loan until that loan paid off.
HOA Boards Blocking Approvals
Many Homeowner Associations simply are unable or unwilling to make any changes to 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 financing and they just don’t want a HUD approval. We have run into several Unit-Owner controlled boards who felt that having a HUD 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 similar stories have been reported by Reverse Mortgage Daily and the LA Times)
Sometimes we can show them that having the HUD approval opened reverse mortgages to their senior owners. Other times, we were able to show that the addition of the availability of FHA financing to well-qualified purchasers increased the marketability of the units. At this time when government-insured financing is so prevalent, FHA insured loans have maximum loan amounts much higher than traditionally available and are used by so many borrowers making units more marketable to more purchasers.
We have been able to show that the sales prices of many projects increased when they were able to open the project to more potential buyers. But sadly, some HOA’s still confuse HUD approval with Section 8 and low-income housing and have refused to cooperate, forcing their senior owners into decisions they really were not ready to make
So, the shocking truth about reverse mortgage with condominiums is that even though you may not owe anything on your unit and you may meet the age requirements, the project may prevent you from being able to get a reverse mortgage. We see more projects being declined then approved at this time by about a 2 – 1 ratio. This is definitely something to keep in mind if you are planning to purchase with a reverse mortgage considering the time constraints on most purchases and the fact that a project approval can take eight weeks or longer (if it gets approved at all).
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. The association is involved in litigation, other than foreclosure proceedings involving unit owners. If so, HUD will need to review this issue at the time of approval and may decline the project.
Current active special assessments, collections or associated work, or special assessment planned within the next 2 fiscal years. If so, again not an automatic decline, but HUD will need to review this issue at the time of approval.
- Your current fiscal year’s budget must reflect a minimum of 10% of the standard assessment value being 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 or 1 unit if there are less than 10 units. The developer of a condominium is exempt from this calculation IF AND ONLY IF the turnover to the association has not yet taken place.
- No more than 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 both 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 no less than the sum three (3) months standard assessments PLUS the sum of the current balances of all reserve accounts, combined.