FHA rule changes enable senior condo owners access to home equity without making mortgage payments.
The Federal Housing Authority (FHA), effective October 15, 2019, relaxed the rules for condominium financing. These changes provide significant benefits to seniors (62 and older) who currently own, or are considering the purchase of a condominium.
Under the old rules, FHA had to review and approve the entire condominium project, which required onerous documentation and reporting. Consequently, few projects agreed to the process. In Massachusetts, less than eight percent of all condominium projects are FHA approved.
This limitation has affected senior owners most severely as the FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage has not been available to them. The HECM program is unique as it enables eligible owners the ability to convert a portion of home equity to cash without the burden of making monthly payments among other features.
The revised rules, which went into effect October 15, 2019, liberalize project eligibility requirements. Most notably, the new rules enable Single Unit Approval (SUA) that, to a large extent, streamlines the approval process requiring less documentation and full project approval.
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 programs. The new policy will allow the owners and buyers (62 and older) of certain condo units to be eligible for the FHA 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.
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.
- Growing credit line – the undrawn balance of the credit line grows, compounding monthly, at the same rate charged on funds borrowed.
- 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.
- Funding and loan terms are guaranteed – cannot be frozen or cancelled, even if the lender fails.
- Reduced obligations – Borrower obligations (to keep loan in good standing) are limited to:
- Keeping real estate taxes, hazard insurance, and property charges current
- Providing basic home maintenance
- Living in the property as primary residence
Purchasing a Condominium with a HECM Reverse Mortgage
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
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.