Editor’s Note: This post was originally published in August 2014 and has been completely updated to include the potential change to bring back a single-unit approval process (located at the bottom of the article).
If you are looking to take out an FHA reverse mortgage against your condo or are looking to buy a retirement or vacation condo using an FHA reverse mortgage purchase loan, it’s important to know that the rules are completely different from fee simple properties (where you own the land in addition to the building). The entire condo complex must be approved by the Department of Housing & Urban Development (HUD) before your loan can be processed.
You might ask why, and there is a pretty simple explanation. The marketability of an individual condo unit is heavily dependent on the health of the complex, financial and otherwise. Say, for example, that one investor owns 25% of the units and files for bankruptcy. If all of those units hit the market at the same time, the property values would be adversely impacted. It could also put the association in bad shape financially, as they would no longer be collecting dues from 25% of its condos.
How to find out if you condo complex is approved?
The HUD condo list is public information and readily available for you to view. Use this link to the HUD Condominium page, type in your zip code, and hit send. If you don’t see your complex listed, then your condo is not currently approved. If it is listed, look under the status column to see if it is approved or rejected (while also noting the expiration date). If expired, the complex will have to go through the renewal process with HUD.
If you don’t share any walls with another unit, your home might be considered a “site condo” and not need to be FHA approved. This is a very small percentage of condominiums and there are five main requirements for a unit to be considered a site condo.
Due to the risk involved, HUD requires a condo complex to seek approval for a period of two years. Before the two year period is up a complex can re-certify to continue their approval. Below are some of the main reasons that a complex might be declined.
- Not contributing 10% of total annual revenue to reserves
- Leasing guidelines aren’t HUD compliant
- Pending litigation or special assessments that will greatly affect marketability
- Insurance issues (hazard, fidelity, flood, etc.)
- Not 50% owner occupied or one investor owns > 10% of the units
- Too many units are in arrears on HOA dues
What is the next step in getting approval?
The application to HUD can be handled by Premier Reverse Mortgage for no fee, but we will need your homeowner’s association or management company to be willing to participate. We waive our fee with the expectation that you will use us for a reverse mortgage after the approval is complete. Most reverse mortgage companies are going to charge a fee to assist with the process or refer you out to a for-profit company set-up for this sole purpose.
One of the biggest challenges that we run into on a regular basis is the lack of desire and sense of urgency from a homeowner’s association, often due to misinformation about reverse mortgages. At the present time, it’s hard to complete the 30-60 day approval process with HUD without having a willing contact at the HOA or management company. The main reason is that we need a balance sheet that is less than 90-days old and some other information that most residents won’t have access to.
If your HOA is willing to proceed, then it is best to put them in touch with us to begin collecting the required documentation. We can assist them with certain items that are more challenging than others, and answer any questions they have. We’ll also be the main point of contact with HUD on the approval as we understand their methodology from past experience.
What if my HOA is not willing or says we were declined in the past?
Unfortunately, there is not a current workaround if your complex was declined for a reason that cannot be remedied. We can usually look up the reason why your complex was declined, and discuss that with you. There are many instances of a complex being “declined” that need to make an easy correction to get approved, such as simply missing a required document in the original submission. It is often ignored because HUD uses the term “declined” vs. “pending” or “more information needed.”
If your HOA is not willing to proceed with the application, you might be able to get all the documentation we need for approval. It would be best to contact us directly for the list of items needed to proceed. We will help you out as much as possible.
Will there ever be any changes to the rules, such as bringing spot approval back?
Based on our expectations, the answer is “yes, with some changes.” If you have a neighbor that took out a reverse mortgage against their condo without having to jump through all the hoops, it’s because they took one out prior to the rule change in February 2010. Prior to that date, one could get their individual condo unit approved for an FHA loan with very little paperwork and just a little help from their HOA. It was called the “spot approval” process.
We know that HUD will not bring the spot approval process back in its previous form due to abuse and poor oversight of the process. The great news is that HUD proposed a single-unit approval process in their most recent proposed rule in the Federal Register that was posted on September 28, 2016. They allowed the public to comment for sixty days before closing the comments on November 28, 2016. While they did not get into great detail on how the single-unit approval process would work, it was a big step to returning to the old way of doing business. Now we wait while HUD discusses each comment and decides on how to proceed. That process can take many months and they are not allowed to comment, so we are kept in the dark. If you would like to read the proposed rule or comments, including my own, please click here.
For those of you that are stuck with a condo association that will not cooperate or a complex that does not meet the current approval criteria, how are you staying up to date on what is happening? I put out an email newsletter once per month that will update you on any information we are hearing about the condo process changing. You will not be sent emails more frequently than that. My suggestion is to sign up using our stay informed link, so you can keep abreast of these potential changes.
I am hopeful that the single-unit approval process will be allowed in the near future, and I look forward to working with many of you when that happens. If you have any questions please don’t hesitate to contact me.