Effects of Reverse Mortgages on Condos and HOAs

https://www.hoalendingxchange.comMany condominiums and HOAs are filled with units and homes that are financed with bank-held mortgages. Reverse Mortgages are available to home and condo unit owners over the age of 62 who would prefer to draw money from the equity in their home or condo unit. These mortgage owners can either take a lump sum or periodic payments from the equity in their home. The mortgage holder gets paid back when the home is sold or liquidated upon the death of the mortgage owner.

The Federal Housing Administration, better known as FHA, is the leading insurer of these mortgages. Banks prefer to offer mortgages to borrowers and real estate that is FHA approved as it means FHA is willing to guarantee some of the risk associated with making the loan. For this reason, FHA approval of the property being mortgaged is very important.

Condominium associations and HOAs are not required to apply for FHA certification. In fact, many voluntarily choose not to undergo FHA certification. There are many reasons for this but FHA certification requires a 10% minimum contribution to the association Reserve Fund and also has percentage of rental unit caps and other restrictions. Associations that forego FHA certification are effectively limiting their unit owners from receiving an FHA-backed Reverse Mortgage. Many unit owners are surprised when they learn that their condominium or HOA unit is not eligible for such a mortgage, especially when their units are paid off and they wish to access their equity. This can lead to outcry from unit owners that the association seek FHA certification.

One concern many HOAs and condominium associations have about Reverse Mortgages is how they can affect the association’s ability to collect delinquent common fees. Once the Reverse Mortgage is issued, it behaves like any other mortgage. The association’s lien on the unit can be superseded by the mortgage holder’s lien in the event of a foreclosure. This can lead to a prolonged foreclosure process in the event of a default. For this reason alone, some associations prefer to keep their association’s free of FHA certification, thus preventing the mortgage holder’s lien from ever getting in the way of the association’s right to foreclose on a delinquent unit owner.

The bottom line is that the decision to seek FHA approval lies strictly with the Board of Directors. Unit owners seeking Reverse Mortgages will not be successful without an FHA approval for the community association. Depending on the number of unit owners aged 62 and greater, the demand for Reverse Mortgages could increase at any HOA. Boards should be aware of the needs of the unit owners and take appropriate steps to meet those needs or be prepared to explain why they chose to ignore them. Reverse Mortgages have grown greatly in popularity over the past few years. If your community association isn’t already approved for such loans, there will likely be a need in the not too distant future.

The decision to seek or not seek FHA certification does not impact an association’s ability to borrow money on behalf of the association should the need arise. HOALendingXchange.com is the ultimate resource for community associations and HOAs seeking money. Get started with your own HOA loan by simply filling out the HOALendingXchange inquiry form and HOA loan experts will get busy preparing their very best HOA loan concepts for your consideration.


3 thoughts on “Effects of Reverse Mortgages on Condos and HOAs”

  1. My condo board issued me a letter that they are not interested in getting FHA approval after I was looking to getting a reverse mortgage. Is there anything I can do? Any news about the spot approval being approved? I own my condo outright but want to access my equity.

  2. Linda, I am sorry that your condo board has decided not to pursue FHA approval for your association. Unless your governing documents require that they do so, they are free to make whatever decision they choose regarding the matter. I am not an FHA expert so I really can’t comment on “spot approval” other than to say I am not aware of any news that might help your situation. My advice is for you to continue to ask your Board to seek the approval and to speak with your fellow unit owners to see if they desire the same and, if so, ask them to also notify the Board. You might also consider a HELOC (Home Equity Line of Credit) that may not require FHA certification of your association. It will not carry the same terms as your reverse mortgage but it would allow you to access some of the equity in your condo. Good luck!

  3. Our concern about FHA is that it requires us to loosen our strict rental policies, some of which cannot be changed by the Board anyway because it is in the Dec pages. Moreover, we wouldn’t change it even if we could, because we covet our 80/20 owner-occupancy rate and our ability to restrict rental requests for buyers in their first year of ownership.

    We think this is somewhat ambiguous. If FHA likes a high owner-occupancy rate, then they should also be agreeable to policies that help us keep it that way. Barring any other explanation, it seems that FHA wants the benefits of having their mortgagors living in a high owner-occupancy building, but also wants them to not be restricted by rental policies. Is it because reverse mortgages and FHA loans are in the high-risk loan category and the lenders don’t want to get stuck with a unit in default that cannot be rented? If so, that is not reasonable from our perspective.

    We are therefore hoping that spot FHA approvals become more commonplace, and/or FHA looks at rental restrictions as a positive aspect of condominium ownership rather than an impediment.

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