New law helps seniors gain HUD approval to convert home equity into cash.
A reverse mortgage is a special type of loan designed for homeowners age 62 or older that allows a borrower to convert a portion of their home equity into cash. No monthly payments are required, and the loan plus interest isn’t due until the borrower moves out, sells the home or dies. Qualifying property must be a single-to-four-family residence, townhouse or condominium, and must be a borrower’s primary residence. Ninety percent or more of all reverse mortgages are Home Equity Conversion Mortgages (HECMs), insured by the Federal Housing Administration (FHA).
Before 2008, the process of applying for a reverse mortgage on a condo or co-op was relatively easy. If you lived in a condominium, the U.S. Housing and Urban Development (HUD) agency would issue a “spot approval” upon receipt of a 1-page worksheet that provided financials and figures, including the percentage of units in a development that were owner-occupied. Co-ops were only eligible for non-FHA reverse mortgages, which were only offered by a few lenders.
Recent Changes for Condos
For condos, the approval process became more difficult when the Housing and Economic Recovery Act was implemented in 2008. Under a 2009 update to the rules, only condo developments on the HUD-approved list (found on HUD’s website) became eligible for FHA-insured HECM loans, and the entire development must apply for and receive approval.
However, a recent law (the Housing Opportunity through Modernization Act of 2016) made certification somewhat easier by lowering the percentage of owner-occupied units required for HUD approval. For certain eligible condo developments, lowering the owner-occupancy requirements may expand their ability to provide FHA financing to their residents. In October, HUD issued what is known as a “Mortgagee Letter (ML),” providing guidance on condominium approvals.
Find Out If Your Condo Is Eligible
An experienced lender will be able to check in a matter of minutes whether your condo is eligible for a reverse mortgage, but here’s where to start on your own.
To find out if your condo development has been approved by HUD, follow this link, which will bring you to a page with a series of dropdown boxes. Because the official name of a condominium project may be different from the one commonly used, choose the state, county and zip code where your condo is located.
If you search “ALL” under the “Status” option, be sure to slide all the way to the right to see the status, which may be “Expired” or close to expiration. You can choose the “Approved” status option to narrow down your selection. For search type, choose “Project,” then click the send button. An error message means that no approved condominium projects were found in your zip code.
HUD has proposed allowing “single-unit approvals” similar to the prior spot approval process. The proposal would require a single unit within a project to meet certain standards, and single-unit approvals would be limited to 0−20 percent of the units within one project. The proposal would also allow some lenders to participate in the approval process of condominium projects.
The public comment period on the latest proposal closed in November 2016. HUD is expected to provide guidance for the approval of condos for the use of HECM reverse mortgages in early 2017.
The Future for Co-Ops
However, the future for co-op owners seeking reverse mortgages is not as rosy. Around 2008, non-FHA reverse mortgages for co-ops disappeared along with the lenders that provided them. Congress made legal provisions for HECM loans in 2000 and updated them in 2008, but since that time, HUD has not issued rules on how they might work. Without the necessary HUD approval, HECM loans cannot be made on co-ops at this time.
Lending on co-ops is complicated because a corporation owns the building, and residents buy shares of stock in the corporation. Each share allows the resident to occupy an apartment in the building, and residents also sign a lease from the corporation. This means that a loan on a co-op apartment would be secured by the stock certificate and assignment of the lease.
The National Association of Housing Cooperatives estimates that roughly half of all co-ops are “limited equity” and are considered personal property, not “real” property; therefore, there is no real estate to serve as collateral for a reverse mortgage. It has been suggested that HUD might model a co-op HECM loan program after the existing Fannie Mae “forward” program for co-op loans.
In New York state, legislation was introduced in 2016 to allow proprietary reverse mortgages for borrowers age 70 or older. The bill passed in the state Senate, but did not make it through the assembly. Because the state legislature operates on a 2-year cycle and a new one begins next year, any bill that did not pass both houses will have to be re-introduced in 2018 before it has a chance to become law.
- By Patricia Whitlock
Patricia Whitlock is a Certified Reverse Mortgage Professional with FirstBank and has been originating reverse mortgages exclusively since 2005.