Key Takeaways
- HOA dues are factored into your Financial Assessment.
- The condo or HOA community itself must be FHA-approved.
- Failing to pay HOA dues can lead to an HOA foreclosure, destroying the lender's collateral.
\n\nWhen applying for a reverse mortgage, most borrowers focus heavily on property taxes and homeowners insurance. However, if you live in a condo or a community managed by a Homeowners Association (HOA), your monthly HOA dues are equally critical to both your approval and your ability to keep the loan in good standing.
The FHA Condo Approval Problem
Before a lender will even look at your personal finances, they must look at your HOA.
Because the Federal Housing Administration (FHA) insures the loan, they require the entire condo complex or HOA community to meet strict financial standards. The FHA wants to ensure the community has adequate cash reserves, proper insurance, and a low percentage of renters versus owners.
If your condo community is not on the FHA-Approved Condo List, you cannot get a standard HECM reverse mortgage. (Some lenders offer proprietary jumbo reverse mortgages for non-FHA approved condos, but these come with higher interest rates and lower payouts).
Impact on the Financial Assessment
When the underwriter calculates your residual income (the cash you have left over each month), they must deduct your monthly HOA dues.
If your HOA charges $500 a month, that is $500 less in residual income you have. In expensive communities, high HOA dues are the number one reason seniors fail the Financial Assessment. If you fail, the lender will likely mandate a Life Expectancy Set-Aside (LESA) to ensure the taxes and insurance are paid, though the LESA usually does not cover the HOA dues themselves.
The Danger of Unpaid HOA Dues
You are legally required to pay your HOA dues for the life of the loan.
In many states, HOAs have extraordinary legal power. If you stop paying your dues, the HOA can place a lien on your property and initiate a "Super Lien Foreclosure." In some jurisdictions, an HOA foreclosure can actually wipe out the primary mortgage lender's lien.
Because of this massive risk, reverse mortgage servicers monitor HOA payments closely. If you fall behind, the servicer may pay the HOA on your behalf (a corporate advance), add the cost to your loan balance, and declare your reverse mortgage in default, triggering a potential foreclosure from the lender.\n