Senior condo owners get long-awaited help from FHA.

On August 14, 2019, the Federal Housing Authority (FHA) announced significant changes to its condominium financing regulations.  The good news is these changes eliminate current barriers that have prevented senior condo owners and buyers from using the FHA insured reverse mortgage and other more favorable FHA financing options.

U.S. Housing and Urban Development Secretary Ben Carson, stated in a press release: “Condominiums have increasingly become a source of affordable, sustainable homeownership for many families, and it’s critical that FHA be there to help them. Today, we take an important step to open more doors to homeownership for younger, first-time American buyers as well as seniors hoping to age-in-place.” (U.S. Department of Housing and Urban Development, HUD Public Affairs, 2019).

Old Rules

Current guidelines restrict FHA financing only to condominium associations that applied for and received FHA approval for the entire project.  Further current approvals require recertification every two years.  Unfortunately, a general lack of understanding among association managers of FHA benefits along with the hassle of the approval and recertification process resulted in limited interest for FHA approval and ongoing recertification.

Improved Guidelines

The revised rules liberalize eligibility requirements and eliminate a number of burdensome restrictions.  Most notably, the new rules restore individual unit approval (called spot approval) that had been in place years ago, but changed to the more restrictive rules in place today.  Important improvements include:

• Single unit (spot) approval eligibility – eliminates project approval currently required
  • Buildings with 10 units or more – no more than ten percent can be FHA insured.
  • Buildings with fewer than 10 units – no more than two units can be FHA insured.
• FHA project approval revisions
  • Minimally, 50 percent of units must be owner occupied.
  • Recertification process extended from two to three years.
  • Mixed use properties – non-residential space increased from 25 percent to 35 percent of total square footage.

What This Means to Senior Condo Buyers and Owners

According to HUD, there are more than 150,000 condo projects in the nation, and only 6.5 percent are approved to participate in the FHA’s mortgage insurance programs.  This new policy will allow the owners and buyers (62 and older) of certain condo units to be eligible for the FHA Home Equity Conversion Mortgage (HECM) reverse mortgage, even if the condominium project is not FHA approved.

This is a game changer.  Current senior owners, previously excluded, may now be eligible for a reverse mortgage to increase financial security, and eligible buyers may be able to purchase a condominium with a limited down payment without the obligation to make mortgage payments.  This new policy goes into effect on October 15, 2019.

The HECM reverse mortgage was developed and approved by Congress to enable owners 62 and older the ability to use a portion of their home equity to increase financial security and longevity.  HECM features (guaranteed as long a loan remains in good standing) include:

• No monthly payment obligations – prepayments are permitted without penalty but not required. Monthly charges are deferred and accrue.
• No maturity date – repayment not required until no borrower resides in the property.
• Non-Recourse loan – neither borrowers nor heirs incur personal liability. Repayment of loan balance can never exceed the property value at the time of repayment.  If loan balance exceeds property value at time of repayment lender is protected by FHA insurance.
• Credit line growth – the undrawn balance of the credit line grows (compounds monthly) at the same rate charged on funds borrowed.
• Funding and loan terms are guaranteed – cannot be frozen or cancelled, even if the lender fails.
• Borrower obligations (to keep loan in good standing) are limited to:
  • Keeping real estate taxes, liability insurance, and property charges current
  • Providing basic home maintenance
  • Living in the property as primary residence

Purchasing a Condominium with a HECM Reverse Mortgage

Aging homeowners transitioning to retirement living commonly sell their home and relocate to more suitable facilities.  In many cases the new home may be a condominium, which many purchase for cash to avoid future monthly mortgage payments, or they may not qualify for traditional mortgage financing.  The problem is, a cash purchase depletes significant funds that otherwise might be available to increase savings.

The HECM reverse mortgage may provide a better solution. Consider the benefit of purchasing with a down payment of approximately 50 percent versus all cash, and financing the balance with a reverse mortgage.  The desired objective of eliminating mortgage payments is achieved, and the buyer has retained the other 50 percent in savings for future needs.

To Learn More

Home equity (housing wealth) is the largest single asset in most households.  Thanks to the record setting increases in Massachusetts home values in recent years, housing wealth has become an important and valuable resource to improve financial planning and extend retirement security.  If, how, and when to use it is a key question.  Every situation is different and the options are increasing as new programs emerge to meet the changing times.  If you would like to learn more and explore the possibilities, you are welcome to call us for more information or to schedule a private meeting.