I know getting a reverse mortgage on a condo isn’t something that most people think is possible so let me clarify. You can indeed get a reverse mortgage on a condo and still live there. And if you’re looking for a reverse mortgage for condos, it’s important to understand how they work and what they can do for you.
Condominium owners who are at least 62 years old and who are eligible for a reverse mortgage may obtain one on their unit, but the condo must be the borrower’s primary residence and receive FHA approval.
- Condominium insurance covers three main things: Building property, personal property, and personal liability.
- Condominiums are similar to apartments in that each unit resides in a building or community of buildings. Condos, however, are owned by their residents, as opposed to being rented from a landlord.
- The annual average cost of condo insurance is $429 but varies significantly by state. According to data from the opens in a new windowNational Association of Insurance Commissioners (NAIC), the annual cost difference between the most and least expensive states for condo insurance is $695.
Reverse Mortgages on Condos
Condominiums are a popular housing choice for seniors, especially those looking to downsize or live in a maintenance-free environment. If you’re considering a reverse mortgage and you’re a condominium owner, you may wonder if you’re eligible.
There are generally no restrictions on obtaining a reverse mortgage on a condominium unit as long as the property meets opens in a new windowspecific requirements.
How Home Equity Conversion Mortgages HECMs Work
You have the ability to access a portion of the equity you have built up in your home through a program offered by the Federal Housing Administration (FHA) called the Home Equity Conversion Mortgage, or HECM for short. You get to decide how you want to access your money, which could be in the form of a predetermined monthly amount, an open line of credit, or a combination of the two.
Are condos and townhomes the same thing?
No, condos and townhomes are not the same things. While they may have some similarities, there are also substantial differences between the two property types.
Condominiums are similar to apartments in that each unit resides in a building or community of buildings. Condos, however, are owned by their residents, as opposed to being rented from a landlord.
A townhouse is a type of attached home that is also owned by the person who lives there. There is at least one wall that is shared with the attached townhome that is located next door. Think of a rowhouse rather than an apartment, and expect a little bit more privacy than you would in a condo.
Condominiums and townhouses can be found in urban areas, as well as rural areas and suburban areas. Either one can be a single story or a collection of stories. What you own and how much you pay for it are at the heart of the condo vs. townhouse distinction, and often end up being key factors when making a decision about which one is the right fit. The most significant difference between the two pertains to ownership and fees.
HECM Borrower Requirements
The Federal Housing Administration sponsors the home equity conversion mortgage and provides insurance on the products. Here are the FHA guidelines and eligibility for these loans.
- You should be at least 62 years old to participate.
- You own the property or have made substantial payments on it.
- They live on the property as their primary dwelling.
- Must not have liabilities or any government debt.
- Must have enough funds to pay property taxes, insurance, and homeowner association payments on time.
Additionally, your lender will also verify your earnings, investments, and monthly living expenditures are all factors to consider. They will also validate that you have an account of real estate taxes that must be paid on time and also flood/hazard insurance premiums.
The Department of Housing and Urban Development in the United States (HUD) insures HECMs on properties that:
- Are single-family homes or two- to four-unit houses, with the borrower occupying one unit.
- A condominium that has been HUD-approved.
- FHA-approved prefabricated home.
These are what you have to ensure to have an FHA-approved condo.
Ineligible Reverse Mortgage Properties
In general, you will not be qualified for a HECM if you do not meet HUD’s core requirements. You will be unable to receive one if you still owe a large sum on your mortgage or if you and your spouse are both under the age of 60.
The following types of properties are ineligible for a HECM:
- Investment Properties
- Vacation homes
Certain repairs may need to be completed before opens in a new windowHUDopens word file will insure the loan. These include health and safety hazards, code violations, and termite damage and the property must also be free of any other liens.
Additionally, you must also comply with state and local laws. For example, some states require that you get a reverse mortgage counseling certificate before you can apply for a loan.
Loan Limits On Condominiums
The FHA establishes annual lending limits for mortgages it will insure. The county in which you reside and the type of property you’re purchasing determine these limits. Low-cost regions have a lower limit, known as the “floor,” while high-cost regions have a higher limit, known as the “ceiling.” It is not uncommon for the maximum loan limit for single-family homes to exceed the minimum.
The annual adjustments to the opens in a new windowFHA Loan Limits are determined by two factors. The first component is geography. HUD states that loan limits differ depending on the town in which the property is situated apart from metropolitan regions, where the limits are determined by “the county with the highest median home price within the metropolitan statistical area.”
Limits are indeed based on a percentage of the Federal Housing Finance Agency’s conforming loan limits (FHFA). Conforming loans are eligible for acquisition by Fannie Mae and Freddie Mac, but are not expressly assumed by any party.
opens in a new windowThe FHA bases the maximum loan amount it will insure on the national conforming loan limits. For instance, the FHA’s least national loan limit “floor” for low-cost areas is usually set at 65% of the complying national loan limit for the United States.
Additionally, the FHA has different rules for loans on properties that are part of an FHA-approved condominium development versus those that are not. In order to be approved, a condominium development must meet certain opens in a new windowstandards set by the FHA.
If you want an FHA condo loan, the HUD search tool is a good place to start looking for a suitable development in your location. Approved condo projects are listed by name, state, zip code, and other criteria on the opens in a new windowHUD search tool.
Insurance Premiums On Condominiums
The annual average cost of condo insurance is $429 but varies significantly by state. According to data from the opens in a new windowNational Association of Insurance Commissioners (NAIC), the annual cost difference between the most and least expensive states for condo insurance is $695.
Condo insurance, also known as an HO-6 policy in the insurance industry, is a specific type of home insurance designed for condominiums. It safeguards your unit and its contents against theft, destruction of property, flood damage, risk of fire, and a variety of other potential dangers.
Condo insurance and traditional single-family homeowner insurance are comparable on the exterior. As with conventional homeowner’s insurance, a condo policy includes coverage for the following:
Building property: entails any part of the structure for which you are responsible.
Personal property: refers to your belongings, such as your furniture, garments, electronic parts, and pieces of jewellery.
Personal liability: This helps protect you from lawsuits that may outcome from incidents such as injuries on your property or other acts of negligence.
Reverse Mortgages on Condo FAQs
You might have heard that you can obtain a reverse mortgage on your condo, but you might not know how they work or if there are downsides to it.
Here are answers to some of the most frequently asked questions concerning reverse mortgages on condos.
What if your condo is not FHA approved?
Even if a condominium development project is not approved by the FHA, the development must still comply with a comprehensive list of requirements. If the condominium development you are considering fulfills these requirements, you will be able to use an FHA mortgage to purchase an individual unit.
Additionally, If the condominium is not FHA approved, the condominium organization may be willing to go through the FHA approval process. Obtaining FHA approval would help condo owners by broadening the pool of possible buyers.
What Are the Downsides to a Reverse Mortgage?
Before taking out a reverse mortgage on a condo, it’s essential to understand the potential drawbacks.
These are some examples:
LOTS OF PAYMENTS
When you obtain a reverse mortgage, you must pay numerous costs comparable to those incurred with a regular loan. These fees include a mortgage insurance premium, an origination fee, a servicing charge, and third-party expenses.
THE LOAN BALANCE GROWS OVER TIME
Because interest and fees are applied to the loan balance each month, your loan balance increases rather than decreases over time, and your home equity drops as your loan balance rises. Because it is a loan, you must repay it with interest.
You must own your property in order to qualify for a reverse mortgage or have a small mortgage balance that you can pay off at closing with the proceeds from the reverse mortgage loan in order to qualify for a reverse mortgage. Unless you have a substantial amount of equity in your home, you may not be eligible for a reverse mortgage.
In the event that you fail to make property taxes and insurance payments, or if you otherwise default on the loan terms, the lender can foreclose payments.
POSSIBLE EARLY REPAYMENT
Apart from when a homeowner passes or moves out, the reverse mortgage loan may have to be repaid sooner than intended if the owner fails to pay property taxes or homeowners insurance, or if the owner fails to maintain the home.
Furthermore, In order to avoid foreclosure, you must stay current on your property taxes and insurance and keep up with routine maintenance on your home.
THERE ISN’T ENOUGH MONEY TO GO AROUND
Even if you are a property owner, and your house is worth more, the government-insured Home Equity Conversion Mortgage’s maximum reverse mortgage limit is $970,800 (updated January 1st, 2022).
This means that if you have a home with a lot of equity, you may not be able to access all of it with a reverse mortgage.
YOU MUST BE AT LEAST 62
If you want an FHA-insured reverse mortgage, the youngest borrower must be 62. If you want a reverse mortgage but you’re not yet 62, you have to wait or look for other options.
YOUR HEIRS WILL ONLY INHERIT WHAT IS LEFT OF THE HOME
If you obtain a reverse mortgage and you die or move out of the home, your heirs will only inherit what is left of the home equity. They will not be responsible for paying back the loan, but they will only inherit whatever is left of the home’s value after the loan is paid off.
This could mean that your heirs will have to sell the home to pay off the loan, or they may have very little equity.
REVERSE MORTGAGES ARE COMPLEX
Because of this, many individuals are unaware that they have a reverse mortgage factored into their existing house. It’s challenging to figure out what you’re paying for and what you’re receiving when it comes to these loans.
There are several different forms of reverse mortgages on the market, each with its own set of restrictions. Before applying for one, you must educate yourself on the specifics of each reverse mortgage type.
Lenders are not always transparent
It cannot be easy to find a reputable and transparent lender. Many different types of lenders offer these loans, so you need to make sure that you go with a lender who will work with you and treat you fairly.
Reverse Mortgages can be helpful when used properly, but they can also be dangerous if used incorrectly. Before taking out a reverse mortgage program, it is important to understand all the terms and conditions.
Working with a reputable reverse mortgage professional is essential when considering a reverse mortgage.
What happens if a reverse mortgage lender goes out of business?
Your loan should not be affected if your lender goes bankrupt or out of business. When a mortgage lender goes out of business, the loans they have made are usually sold to another lender or service company.
A condo unit can be a great housing option for older adults, but it’s essential to understand the potential downsides before making a purchase. Before taking out a reverse mortgage, make sure you are comfortable with the possible early repayment terms before taking out a reverse mortgage. Ultimately, condominiums can be a great option as long as you do your research ahead of time.
If you would like to learn more about reverse mortgages on condos, feel free to contact me and have a opens in a new windowquick call!