Ever since the Federal Housing Administration eliminated spot approvals for condominiums, reverse mortgage originators have logged countless hours helping prospective borrowers secure a HECM on their condo – sometimes to no avail.
And, with the Department of Housing and Urban Development dragging its feet for the past two years on finalizing rules that would bring back spot approval for FHA loans, things might not change anytime soon.
Under current FHA policy, the only way to obtain a HECM on a condominium is to get FHA approval of the entire complex, a process that requires a good deal of documentation, including proof of adequate insurance, confirmation that no one individual owns more than 10% of the complex, evidence of sufficient cash reserves, and verification that at least 50% of the units are owner-occupied.
For HECM originators, the task of helping a condo owner get a reverse often comes with the added hassle of obtaining FHA approval of the entire complex, which some associations are unwilling to do.
“When I’m talking to a potential borrower and I find out that they’ve got a condo, I say a little prayer and hope to God that they’re approved, but usually they’re not,” said Philip Lipp of Allwest Mortgage in Valley Village, California.
Considering the sizable number of condominium complexes across the country, only a small number – under 10,000, or about 6% according to the Community Associations Institute – are approved by the FHA.
“I turn away at least one senior a week who wants to do a reverse mortgage, who is living in beautiful condominium, but the condo association doesn’t want to go through the expense or aggravation to get them approved,” said John Luddy of Norcom Mortgage in Avon, Connecticut.
Sometimes, a condo association will allow the prospective HECM borrower to pursue FHA approval on their own, gathering the documentation and shouldering the expense involved in order get their loan.
Robert Pacelli, Jr. and Joseph Cessario are attorneys with Zeldes, Needle Cooper in Stamford, Connecticut. They have helped a number of condo associations seek FHA approval, and say that lately they’ve been more frequently approached by individuals who are looking to go through the approval process on their own.
Pacelli said they often run into pushback from members of the condo association who are unwilling to support the pursuit of FHA approval because of the stigma attached to reverse mortgage borrowers.
“There’s a lot of people out there who are excluded from the product by virtue of the lack of understanding of its importance by the association boards and managers,” Pacelli said.
Luddy also said he often encounters resistance from condo associations.
“Some of the associations’ management don’t want to be bothered, while others think that somehow it’s going to lower the value, when really it should raise the value,” he said.
“When you go to sell, the more people who qualify, the more demand there is for that unit, the more you’re going to be able to get for the property,” Luddy explained. “You want to be able to increase the pool of borrowers, not shrink it.”
The associations that are willing to explore the FHA approval process often hire outside consultants who specialize in obtaining FHA approval, or attorneys with FHA experience like Pacelli and Cessario, to help them pursue approval.
The process can cost about $1,200-$1,500 and can take a few days or, more likely, a few months.
Before 2009, when FHA eliminated spot approvals, securing a reverse mortgage on a condo was a much simpler process. In 2016, Congress passed a bill that would make FHA approval less restrictive, but HUD has yet to finalize these rules and put them into play.
In the meantime, HECM originators will just have to slog through the approval process if they want to close a loan – unless a proprietary reverse mortgage could provide the answer.
Non-agency jumbo reverse mortgages have flooded the market in the past year, finally providing the FHA’s HECM with some legit competition.
Now offered by five different lenders, nearly all proprietary reverse mortgages tout less restrictive qualifications for condos.
Heather Quinn, a condo specialist Reverse Mortgage Funding, said the lender’s proprietary product has found real traction with condo owners as it accepts condos that are Fannie Mae-approved or that meet the lender’s own approval standards.
“In the past few months, we were able to approve a significant amount of non-FHA-approved condo projects using our new Equity Elite Condo Project Approval Process. There are differences between the FHA approval and the Equity Elite approval allowing us to do business with more communities,” Quinn said.
“This has been a huge help to our reverse mortgage condominium business – and our customers – indeed!” she added. “We are seeing it not only used as a jumbo product for higher-value homes and condos, but it also has made it easier for condo owners of more modest means in certain non-FHA-approved communities to remain in their homes.”
Luddy said the ability to secure a reverse on a condo – either with a HECM or a non-agency loan – is crucial.
“For seniors who have found their forever home and who want to age in place in those condos, it’s so critical and such an important way to help them,” he said.