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. HUD has changed their program guidelines recently that have made condominiums a little easier to use as security to obtain a reverse mortgage, but it is still tougher than a single family detached residence and you should know the issues from the start.
How condo associations benefit from Reverse Mortgages
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 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 managers itself may prevent you from being able to get a reverse mortgage.
We see more projects being declined than 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).
The last thing you want to do is place an offer on a condominium unit only to find that you have a time 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 do not want to find yourself in a situation where you are at risk of 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 but I warn you about trying to be your own “condominium expert”.
Your best bet is always to look for a property that is already on the HUD approved list but remember, this is not a 100% guarantee if something happened between the time that HUD placed the project on the list and now you wish to purchase. Leave yourself enough time to get the project documentation together and have it reviewed and leave an out in the contract in case the project status has changed.
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.
History of HUD condo approval process
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 (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 of 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 was removed). Many borrowers were able to obtain both forward and reverse mortgage loans that were insured by FHA on HUD programs in condominium projects with just a very minimal review as most projects did not approach the 10% maximum without obtaining a HUD approval on the project.
Mortgagee Letter 2009-46 eliminated the Spot Approval Process and established a 2-year recertification period for all projects already on the approved list. 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. All new loans had to follow the new guidelines for all borrowers who got their Case Numbers on or after December 7, 2009.
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 the entity responsible for the approval of the project even when they were not necessarily the company closing other loans and 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.
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. The lender must gather a complete list of project documentation for delivery to HUD for review and the review and approval can take up to 6-8 weeks to complete once the complete package is submitted to HUD. During the Covid 19 Pandemic, those timeframes often stretched longer.
Homeowners and others often made the mistake of searching title and seeing evidence of reverse mortgage loans in a project and assume that the project is approved and while 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 even tell us they were not worried about their project because they were sure it would be approved. Their place and their project were 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. HUD needs to see that the project is solvent and has adequate money in reserves for capital expenditures and repairs of deferred maintenance. The money kept in a trust account for such items should equal no less than 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). 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 delinquent on their HOA dues. No more than 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 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 probably 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 the effect it may have 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.
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 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 but 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 and HUD would not be able to insure another loan until that loan paid off since HUD will approve the insurance on loans in projects as small as 2 units.
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-insured 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 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 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. After all, the maximum lending limit for loans in 2023 is over $1,000,000 at $1,089,300. We are not talking about just small, insignificant units at these property values!
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.