Can I get a reverse mortgage on a co-op?
While reverse mortgages have been available to homeowners since 1961, the loans have been taboo for residents of housing cooperatives (aka “cooperatives”). Reverse mortgages allow older homeowners to borrow against their home equity, but there are strict requirements for both borrowers and properties.
Previously, New York homeowners could get reverse mortgages on one-, two-, three- and four-unit homes or condos, but not co-ops. However, in early 2022, the New York State Assembly passed legislation making co-ops eligible for reverse mortgages. The law goes into effect May 30, 2022, and New York residents can finally get reverse mortgages on co-ops. That’s how it works.
The central theses
- A reverse mortgage allows homeowners age 62 and older to use their home equity without selling the home or making monthly payments.
- The loan only becomes due when the last borrower sells the house, moves out permanently, or dies.
- A cooperative is a type of residential property owned by a corporation where the residents are voting shareholders of that corporation.
- Beginning May 30, 2022, New York State residents will be able to obtain private reverse mortgages for co-op housing.
- The Federal Housing Administration (FHA) does not allow home equity conversion mortgages (HECMs) on co-ops.
What is a Reverse Mortgage?
A reverse mortgage allows homeowners ages 62 and older to access their home equity without selling or making monthly payments. Instead, borrowers receive a lump sum, monthly payments, or a line of credit from their lender (or a combination of the last two).
These loans can provide much-needed funds in retirement to pay for things like basic living expenses, medical bills, and home repairs. Unlike traditional “forward” mortgages, no loan payments are due until the last borrower sells the home, moves out, or dies.
If the holder of a reverse mortgage fails to meet their obligations under the loan by defaulting on tax and/or insurance payments or by defaulting on maintenance, foreclosure may result.
Borrower Requirements for Cooperative Reverse Mortgages
Under the new law, a reverse mortgage for a co-op will be known as a “reverse co-op loan.” You must be at least 62 years old (same minimum age for most reverse mortgages) to qualify for the loan. If your cooperative unit is held by tenants in bulk or for rent together, the youngest person must be 62 years of age or older. Additionally you must:
Borrowers must certify annually on each reverse loan anniversary that they reside in the cooperative unit and that this is their primary residence.
Reverse mortgage lenders need to protect borrowers
Beginning May 30, 2022, New York state cooperative residents who are 62 years of age or older may apply for a reverse mortgage. However, the new law places a burden on reverse mortgage lenders to protect borrowers by requiring each lender to:
- Obtain a $100,000 bond to cover claims against the lender if the lender defaults on the borrower’s obligations.
- Maintain a minimum capital of $10 million (the lender can rely on its parent company to meet the minimum capital requirements).
- Explain the terms of reverse mortgage loans and how they comply with New York State law and US housing and urban development (HUD) standards.
The standards specifically require lenders offering reverse co-op loans for residential units to:
- Specify the credit terms and payment schedule.
- Recommend applicants to consult with the relevant authorities regarding the tax and probate consequences of the loan.
- Describe the prepayment and refinancing characteristics of the loan.
- Notify the borrower of the interest rate on the loan and the estimated total interest.
- List the events that could cause the borrower to default on the loan.
Additionally, a reverse co-op unit loan is non-recourse, meaning that when the loan matures, you cannot owe more than the value of the co-op unit stock certificate.
Reverse Mortgage Loan Payout Options
After signing the reverse mortgage loan agreement, you have a three-day right of cancellation to terminate the loan interest-free. After that, you have three main options to get your reverse mortgage money:
- term payment – The lender pays you equal monthly payments for a fixed term of months that you choose.
- tenure payment – The lender pays you equal monthly payments until the loan is fully paid off or matures.
- line of credit – You borrow some money now and leave some credit available for the future until the credit limit is exhausted.
Co-op reverse mortgages are secured by shares or membership in the co-op that is the borrower’s primary residence.
When is a cooperative reverse mortgage due?
If you have a reverse mortgage on a co-op, the entire loan balance is due when:
- The cooperative is no longer the primary residence of at least one of the borrowers.
- You are moving out for at least 12 consecutive months because of a physical or mental illness and the co-op is not the primary residence of at least one other borrower.
- You fail to meet one (or more) of the loan obligations, such as For example, paying monthly maintenance fees, mortgage insurance payments, or special audit fees.
Can reverse mortgages have co-borrowers?
Can I get an HECM in a co-op?
Cooperatives are not eligible for reverse mortgages as HUD only insures reverse mortgages (either an HECM or an HECM for sale) secured by real estate. Federal law hasn’t changed, so only private lenders offer reverse mortgages on co-ops.
The final result
Reverse mortgages can provide additional income during retirement, which can be especially important if you have a steady income. However, reverse mortgages come with several fees, including processing fees, mortgage insurance, closing costs, interest, and processing fees. Be sure to shop around and compare the cost of the loans available to you before making any decisions.