Acceptable Properties For a Reverse Mortgage
A number of different residential properties types are acceptable. Commercial property is not allowed. Having a property that doesn't qualify is one of the most frequent reasons a reverse mortgage is not approved by underwriting.
The largest percentage of properties are single family homes. Most single family homes will qualify. Some single family homes may meet the basic guidelines but, in the end, not be accepted. Some unique style homes may seem to qualify - such as a 'dome' style. But typically, the appraiser will not be able to find other domes to compare to in order to establish a market value. Other cases might be ones in poor condition. While FHA isn't as strict as it once was, there are still occasions when the home doesn't meet minimum qualifications. On one loan I worked on, the an old Victorian looked fine to me but the appraiser noted serious problems with the foundation. After an inspection by a contractor, it was determined major repair to the foundation was required. This would require jacking up the home while this was done. The total expenses exceeded FHA guidelines (and also used up all the money available in the reverse mortgage).
Concerns noted above would also apply to all the properties below.
2-4 unit dwellings where the borrower lives in at least one of the units. These may also be referred to as duplexes, triplexes and 4-plexes. The borrower may rent out the other unit(s).
A farm on agricultural land may or may not qualify. Part of the issue will be how many acres make up the estimate value of the home. The reverse mortgage is for the home recognizing it is on land and is surrounded by land. A home valued at $100,000 because it is on 1000 acres may only be worth $40,000 if it were compared with all the other similar homes in the area which are on less than 5 acres. At that point, there may not be enough money in the reverse mortgage to make it worth while.
Additionally, if it is an income producing property, it will not qualify. Examples would be a vineyard that is not for personal use, a horse ranch used to board horses for a fee or to train horses for a fee, or a working farm - even if the owner lives in a house on the same parcel. The possible way around this is to subdivide the property with the house on one parcel and the income producing portion on another.
PUDs (Planned Unit Developments) are eligible. These are usually single family homes that are attached to other single family homes. The owner of the unit owns the land under his unit and may have a percentage interest in the common area that makes up the PUD.
Townhomes qualify. Townhomes are attached single family dwellings with each owner owning the land below them. Frequently as a row of houses. Sometimes around a courtyard. There may or may not be common areas. Sometimes condos are referred to as townhomes even though that is not technically correct.
Condominium units also referred to as condos may or may not qualify. A condo ownership is just the inside of the unit and a percentage ownership of the common areas. It is frequently said a condo owner only owns the 'air' inside the unit.
A special consideration for condos is whether the complex been pre-approved by HUD. If it has been pre-approved, you are good to start. That answer may be determined at the HUD Condominium site. In using this site, there are a few cautions. First, change the Status drop down menu at the bottom to All. If a complex had been previously approved but is now in any other status, our normal alternative (spot-condo approval) is not an option. DO NOT TRY TO FILL IN ALL THE CHOICES. That will almost surely eliminate your condo due to a spelling or some other error in the database. Choose your state. Next search by city. It is not unusual for the database to not have a zip or the wrong zip. Review the list and see if yours is there. If not, try instead by zip. Change the city back to blank. If that doesn't work, change the zip back to blank and enter the first word of your complex. If you can't find your complex, don't panic. It is possible to do what is called a 'spot condo' approval. The lender will ask to have a form filled out by the Homeowner's Association. You can see the list of questions at the bottom of HUD Mortgage Letter 96-41.
(Update as of 9/23/2010) In late 2009, HUD changed the rules for condos. All properties were taken off the pre-approved list. Spot condo approvals are no longer available. All properties have to be (re)approved to qualify for any FHA mortgage. In 2010, the method to do so was detailed and properties are now beginning to be approved. A number of properties had their approval automatically extended to 12/7/10. If that was the case, they will need to go through the full process to get their approval extended.
Co-ops are now eligible with the permission of the co-op board. However, HUD has not set up guidelines for co-ops (even though Congress approved) so lenders still can't do them as of this update (3/20/2011).
Some manufactured homes are eligible. Manufactured homes have a LOT of rules. Briefly, they have to be on their own lot, manufactured in 1978 or later and be on a permanent foundation with the wheels removed. The manufactured homes I've seen qualify are typically out in the country on their own lot. They have a permanent foundation with the wheels removed. Again, there are a lot of rules. Most Reverse Mortgages are approved and funded fairly easily. Most of the loans I have done that have NOT worked out have been manufactured homes because they didn't meet at least one of the rules. I'll have a much more detailed page on the Details Index soon.
Mobile homes in a mobile home park or mobile home 'condo' complex are not eligible. Most mobile homes in a park are considered 'personal property'. The Reverse Mortgage is a Real Estate loan and the property must be 'real property'. The land under the home must be owned.