Reverse Mortgages on Condos

You can qualify for a reverse mortgage, such as an FHA-insured Home Equity Conversion Mortgage (HECM), if you own a condominium, so long as the property is your principal residence and you and the condo meet other eligibility requirements. Reverse mortgages aren't limited to single-family detached homes.

But once you learn more about reverse mortgages, including their downsides, you might want to reconsider getting one.

How HECMs Work

HECMs are the most popular type of reverse mortgage. The U.S. government insures HECMs through the Federal Housing Administration (FHA), and HECMs are sold by FHA-approved lenders.

The insurance mostly protects the lender, not the borrower. It comes into play if the loan is accelerated (called due) and the house isn't worth enough to pay back the lender in full through a foreclosure sale or another type of liquidation process, like a deed in lieu of foreclosure. In those cases, the FHA will compensate the lender for the loss. So, if you have a HECM and lose the home to foreclosure, you won't have to pay a deficiency judgment. The insurance covers the loss.

A HECM doesn't become due until the last borrower sells the home, moves out, stops paying property charges (such as taxes and insurance), or dies. However, in some cases, a nonborrowing spouse may remain in the home.

HECM Requirements and Eligibility

HECMs are generally available to borrowers at least 62 years of age, occupy the property as a principal residence, and own the home outright or have significant equity in the home (typically 50%), subject to some restrictions and requirements.

Properties Eligible for a HECM

Many different types of properties are eligible for a HECM, including:

• a single-family home
• a one- to four-unit dwelling (and you occupy one unit)
• a townhouse or condominium, and
• a manufactured home that meets FHA requirements.

Some condos won't qualify for a HECM, but many do. FHA has many property requirements, such as safety (the property must protect the health and safety of the occupants), security (the property should retain its value), and soundness (the property must be in good condition).

Other HECM Requirements

Additional eligibility requirements include the following, among others:

• You can't be delinquent on any federal debt.
• Your home must be in good condition.
• You must have financial resources to make timely payments for ongoing property expenses, like property taxes, homeowners' insurance, and homeowners' association (HOA) fees.

You'll also have to comply with some more requirements, like maintaining the property, attending a counseling session with a HUD-approved counselor, and, in some cases, having a set-aside account for future property tax and homeowners' insurance bills. The lender will also verify your income, assets, monthly living expenses, and credit history. (While there isn't a minimum credit score required for a HECM, your credit reports will show whether you have any federal tax liens or delinquent debts that could affect your eligibility for the loan.)

To learn all of the eligibility requirements and criteria, talk to a HECM lender.

What Are the Downsides of a HECM Reverse Mortgage?

Reverse mortgages have significant downsides:

• The lender may call the loan due in many different kinds of scenarios.
• The process can be cumbersome, involving a lot of documentation.
• You could lose the property to foreclosure if you default.
• Reverse mortgages can be expensive due to closing costs, interest, servicing fees, mortgage insurance, and other fees.
• A reverse mortgage could affect your eligibility for Medicaid.
• By taking out a reverse mortgage, you spend down the equity in the property, which means you won't be able to access it later on to cover costs for things like long-term health care costs, to finance a move, or leave to your heirs. You can still leave the home to your heirs, but they'll have to repay the loan.

For More Information About HECMs

If you're considering a reverse mortgage, it's highly recommended that you proceed cautiously and ensure you understand all the risks and conditions involved with such a loan. For more information on reverse mortgages and the risks related thereto, visit HUD's How the HECM Program Works website and AARP's reverse mortgage webpage. You can also go to the Federal Trade Commission's website on reverse mortgages or the Consumer Financial Protection Bureau's website to get more information.

An attorney can also help you review the pros and cons of a reverse mortgage. Even though you'll have to complete a counseling session with a HUD-approved counselor to get a HECM, it's also wise to talk to a financial planner, an estate planning attorney, or a consumer protection lawyer before taking out this kind of loan.