Reverse Mortgages in New York: Co-Op Laws Explained
Key Takeaways
- Historically, co-ops were entirely ineligible for reverse mortgages.
- New York recently passed legislation allowing reverse mortgages on co-ops.
- You cannot use an FHA HECM for a co-op; you must use a proprietary private loan.
For decades, seniors living in New York City faced a massive financial injustice: if they lived in a condominium, they could get a reverse mortgage, but if they lived in a housing cooperative (a co-op), they were banned from the program.
Given that a massive percentage of NYC real estate consists of co-ops, thousands of house-rich, cash-poor seniors were locked out of their equity.
Why Were Co-Ops Banned?
The issue comes down to legal definitions of real estate. When you buy a house or a condo, you receive a deed to the physical property. A reverse mortgage is a lien placed against that deed.
When you "buy" a co-op, you do not actually buy real estate. You buy shares in a corporation that owns the entire building, and in return, you are granted a proprietary lease to live in a specific unit. Because you own shares (personal property) rather than real estate, traditional mortgage laws do not neatly apply, and the FHA explicitly refuses to insure HECMs on co-ops.
The New York Legislative Fix
After years of lobbying, New York State finally passed a law allowing seniors to obtain reverse mortgages on co-op apartments.
However, because the federal FHA still refuses to insure them, you cannot get a standard HECM on a New York co-op.
Instead, you must apply for a proprietary reverse mortgage (often a Jumbo loan) offered by a private lender that has tailored a specific legal product for the New York co-op market.
The Board Approval Hurdle
Even though the state law allows it, the most difficult hurdle remains your Co-Op Board.
Co-op boards are notoriously strict and possess immense power over who can buy, sell, or finance units in the building. A private reverse mortgage lender will not approve your loan unless the Co-Op Board signs a recognition agreement acknowledging the lender's lien against your shares.
Many conservative co-op boards are terrified of reverse mortgages and will flatly refuse to sign the agreement, effectively killing the deal. Before spending money on an appraisal, you must speak with your co-op board president to ensure they are willing to cooperate with a reverse mortgage lender.