Insights & Advice


FHA approval is critical to elderly condo owners

Ever hear the expression “cutting off your nose to spite the face?” That’s exactly what the vast majority of condo owners are doing by not pursuing a Federal Housing Authority approval of their condos. Here’s why.

Over the past few weeks, I have written several columns on the subject of reverse mortgages, Home Equity Conversion Mortgages (HECMs), the marketability of your existing home, etc. More and more Baby Boomers are opting to down-size (sell their empty nest and buy something smaller, like a condo) in order to reduce expenses, prepare for retirement, or simply take advantage of a rising housing market.

While down-sizing makes economic sense, many elderly retirees have ignored a critical factor in the process–the ability to be able to tap into their new housing asset in a time of need. As readers now know, the potential market of buyers for your dwelling is considerably expanded if you have FHA approval. In addition, mortgage rates are lower, and banks are willing to lend more. Bottom line, it is easier to sell your home or condo with FHA insurance approval.

However, only a handful of condo dwellings across the nation actually apply for FHA approval. For most potential buyers, approval doesn’t seem to be an issue at first. Builders and management companies often discourage it as well since the approval process requires time, effort, and some money.

But as the owners age, some retirees encounter unexpected difficulties (health issues, sudden, but necessary, draw-down of retirement savings, etc.). Since many retirees are living on a fixed income, they don’t have the additional income they need to weather these emergencies. That’s when a reverse mortgage might make sense. Unfortunately, without FHA approval, that avenue is permanently closed to aging condo owners, who have few other alternatives.

Last week, I wrote about HECMs (a reverse mortgage, which could substitute for long-term care insurance); that is also not an option, because that instrument also requires your condo to be FHA-approved. As a result, even though your condo may be your single largest asset, you have no ability to tap into the equity of that asset without selling it. If you need the money fast, unloading it will usually mean selling at a distressed price.

My wife and I own a condo, which is a great example of this issue. The 27-unit dwelling situated in the heart of town, is part of a converted historic papermill. Over 250 years old, it was restored at a great expense and is considered one of the jewels of the community. The builder thought it was an unnecessary expense to apply for FHA-approval, and since few condos in the area had applied for it, why should he?

When I asked our building agent about approval, she referred me to the board of trustees of the condo associations. She explained “more often than not, associations choose not to do this for different reasons.” So, what are these reasons?

Getting FHA approval for an existing condo takes time, effort and money. The FHA-issued approval requirements are 95 pages long and vary with the type and size of the condo. The requirements are designed to protect residents against financial hazards arising from their responsibility for the condominium’s affairs. To me, that seems like a good thing, given the price we paid for our condo.

Some of the supporting evidence required are documents describing the condo project, the condo’s legal documents, the annual budget, a report from the management company, minutes from two condo meetings, etc. All of these documents should be easily attainable unless your condo is in real trouble. Given how much is at stake for elderly retirees, why then, wouldn’t every condo board seek FHA approval?

In my opinion, the major reason is the apathetic myopia of the condo residents. Yes, FHA approval makes it easier to sell units in the condo, but if you are not planning to sell immediately, why bother? Here’s why.

In our condo, we have had two recent cases where the retiree owners encountered unexpected difficulties. One owner had medical difficulties and needed to move to Colorado immediately, where her daughter could provide care for her. In the other case, the spouse of the owner passed away. The wife needed to unload the condo and move to Florida.

Since only a small number of condo owners will need to sell, apply for a reverse mortgage, or use a HECM as a way of providing long-term care insurance, at any given time, the rest will likely be indifferent to other’s difficulties and needs—until their time comes. The vast majority of our condo owners are elderly and retired. The probability that they will be hit with long-term care expenses, health problems, or financial difficulties as they age is quite high. As for those few condo owners who are young, they don’t believe they will ever grow that old, or run out of money when they do.

Few condo owners would ever risk not taking out homeowner’s insurance on their condo but blithely ignore FHA insurance. It makes little sense. So, my advice is to pick your nose up off the floor, get serious about protecting and utilizing your main asset, and get your condo FHA insured.

There are dozens of consultants available who can guide a condo board through the entire process. In some cases, it can be accomplished in as little as two weeks, or as much as 2-3 months, depending on the size and complexity of the application. So, what are you waiting for?

Posted in Financial Planning, The Retired Advisor