Q: I am working with a client (older than 62 years of age) who is struggling to support herself during her retirement and has been unable to sell her cooperative unit. I understand that a reverse mortgage may be an effective way for her to supplement her retirement income. Are reverse mortgages available on co-op apartments?
A: No, reverse mortgages are not currently available to owners of co-op apartments.
A reverse mortgage affords a homeowner, who is 62 years of age or older, the opportunity to obtain a loan by using the equity in his or her home. While there are a number of unique aspects of a reverse mortgage, one of the most important features is that the borrower is generally not required to repay the loan until such time as: (i) the borrower sells the property, (ii) is deceased or (iii) no longer uses the property as his or her primary residence (collectively a "Disposition Event").
The term "reverse" is derived from the payment stream of the loan proceeds. In a traditional or "forward" mortgage the borrower repays the lender on a monthly basis throughout the life of the loan. In a reverse mortgage the lender provides the borrower with mortgage proceeds (the proceeds could be a lump sum or some type of monthly or periodic arrangement), but the borrower is not required to repay the loan until after the occurrence of a Disposition Event. Thus, the payment stream in a reverse mortgage is "reversed."
Another important feature of a reverse mortgage is the "non-recourse" provision. This provision indicates that the lender may only look to the fair market value of the mortgaged property to satisfy the amount that is owing to the lender. The lender cannot look to the individual borrower or the borrower’s heirs if the fair market value of the mortgaged property is less than the outstanding balance of the reverse mortgage at the time of a Disposition Event.
In reverse mortgages (as is the case with forward or traditional mortgages), ownership of the property remains with the borrower and the borrower must continue to pay property taxes, insurance, maintenance fees, and other expenses related to ownership of the property. If the borrower does not pay these expenses or does not maintain the property according to certain guidelines, the lender may require the borrower to repay the loan before the occurrence of a Disposition Event.
The most common and widely available reverse mortgage product is insured by the U.S. Federal Government through the Federal Housing Administration and is known as the Home Equity Conversion Mortgage ("HECM"). In order to qualify for a HECM, amongst other things, the borrower must: (i) be at least 62 years of age or older, (ii) own the property outright, (iii) occupy the home as a primary residence, (3) not be delinquent on any federal debt, (4) have the financial capability to continue making timely payments of ongoing property charges such as property taxes, insurance and Homeowner Association fees, and (iv) meet with a government-approved reverse mortgage counselor before the loan application is processed.
Co-ops are not eligible under the HECM program because co-ops are not real property. Furthermore, while certain lenders have offered reverse co-op loans in the past, there are no lenders currently offering reverse co-op loans today. Condominium units are eligible for reverse mortgages under the HECM reverse mortgage program.
The Legal Line Question by:
Neil B. Garfinkel
REBNY Broker Counsel
Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP