A reverse mortgage can be a powerful financial tool for older homeowners who want to supplement their retirement income, fund home repairs and modifications that will help them age in place, and resolve financial issues without selling their home outright.
Similar to a home equity loan or a home equity line of credit, a reverse mortgage helps homeowners tap into their home equity and cover their current expenses. However, a reverse mortgage is only available to homeowners 62 and older who meet specific requirements.
In this article, we discuss reverse mortgage requirements for potential borrowers and their properties, as well as how these requirements may affect the total loan amount.
Key Reverse Mortgage Requirements
To get a reverse mortgage, you must fulfill age requirements, have a history of meeting your financial obligations, and own most of your home. Your property must meet a set of standards, as well. Here are the main reverse mortgage requirements.
Age
The minimum age requirement for a reverse mortgage borrower is 62, and if both spouses are listed as borrowers, both must meet the age requirement. If one spouse is younger than 62, they can be listed as a non-borrowing eligible spouse, so the couple can still apply for a reverse mortgage.
The borrower’s age also influences the size of the loan. Younger homeowners typically qualify for a lower total loan amount, as older borrowers are statistically more likely to pass away sooner, reducing the lender’s risk. If two people apply, lenders take into account the age of the youngest borrower when deciding on the loan amount.
Ownership and Equity
Reverse mortgage borrowers must use their primary residence as collateral and have at least 50% equity in the home. Equity is calculated against the appraised value of the property or its current market value for a reverse mortgage.
However, if you want to get an FHA-insured home equity conversion mortgage, there is a lending limit of $1,149,825 in 2024. If your home exceeds this limit, you can either accept the maximum appraised value of $1,149,825 or look for a proprietary reverse mortgage.
Property Type
Not every property type is eligible for a reverse mortgage. You can get a reverse mortgage on the following types of properties:
- Single-family homes
- Multi-family properties with 1-4 units in which the owner occupies one unit
- HUD-approved condos
- Manufactured homes approved by the Federal Housing Administration (FHA)
Rental properties, vacation homes, and second homes are not eligible for a reverse mortgage.
Financial Requirements
There are generally no income or credit score requirements since you’re not required to make monthly payments, as the lender pays you for your equity.
Instead, the lender will consider how well you can cover ongoing property charges such as home maintenance costs, property taxes, homeowner association fees, and homeowner’s insurance.
Mandatory Requirements
Your loan servicer will also have other reverse mortgage requirements, including mortgage counseling, closing costs, and meeting property standards set by the Department of Housing and Urban Development (HUD) and the FHA.
HUD-Approved Counseling
All potential borrowers must have a mortgage counseling session with an advisor approved by HUD. This session helps the borrowers understand the financial implications of a reverse mortgage, as well as any alternatives, such as a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC).
The financial advisor can also help you choose the best way to draw funds from your reverse mortgage loan, including a lump sum payment, a revolving line of credit, a monthly payment, or a combination of the three.
Reverse Mortgage Funds for Closing Costs
If you want to qualify for a reverse mortgage, you will have to set aside funds for closing costs, just like with any other mortgage. The most common closing fees and other mortgage expenses include:
- Mortgage insurance premiums (MIP) – The MIP consists of one initial payment (2%) and annual payments that are generally 0.5% of your outstanding mortgage balance. They are paid directly to HUD.
- Loan origination fee – Lenders can only charge $6,000 for a home equity conversion mortgage (HECM) loan, which is the most common type.
- Servicing fee – Loan servicing fees are paid monthly, and they are usually around $35.
- Appraisal fee – The appraisal fee varies by state, property size, and location, but it is usually $300 to $400 for a single-family home.
- Counseling fee – The fee is paid directly to the HUD-approved agency and is typically around $150.
- Interest charges – Interest charges are not paid through monthly mortgage payments. Instead, they are added to the total balance, which is due after the homeowner passes away, moves out, or sells the home.
Property Standards
As with a traditional mortgage, the lender needs to know the property meets safety standards set by the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD).
This ensures the property is worth the appraised value and without significant issues. The FHA standards ensure the following:
- The occupants’ health and safety
- The home’s livability and marketability
- Physical condition
The standards mainly focus on major concerns like structural integrity, meeting local building codes, sufficient and appropriate water supply, electrical system, HVAC, fire safety, and sanitary and functional sewage removal. Normal wear and tear is not an issue.
Factors Affecting Reverse Mortgage Eligibility
Even though there are no income requirements, whether or not you qualify for a reverse mortgage depends on other factors related to your personal finances.
Existing Mortgage Balance
If you have an existing mortgage, the loan proceeds you receive from the reverse mortgage will first be used to pay that off, reducing your net loan proceeds.
After that amount is settled, you can use the remaining money as you wish. However, a large mortgage balance may make you ineligible for a reverse mortgage, as lenders require you to either own your home entirely or have significant equity.
Liens and Judgments
If you have court judgments and outstanding tax liens in your credit history, your reverse mortgage application will not be approved until you resolve the issues. You will either have to pay them off outright or create a repayment plan with the IRS. You also cannot use your loan proceeds to pay these amounts.
Government Debt
If you owe anything to the federal government, such as federal student loans or federal property taxes, you will probably not be eligible for a reverse mortgage, especially a HECM mortgage.
The lender will also look at your other obligations to ensure you pay property taxes, homeowners insurance, and other property-related expenses regularly.
Types of Reverse Mortgages
There are three main types of reverse mortgages: home equity conversion mortgages (HECMs), proprietary reverse mortgages, and single-purpose reverse mortgages. However, the most popular type is the HECM, as it’s the easiest to find and qualify for and generally has favorable terms.
Home Equity Conversion Mortgages
Home equity conversion mortgages (HECMs) are the most common reverse mortgages. They are insured by the FHA, so the lender must ensure they meet the agency’s standards.
Compared to proprietary reverse mortgage loans, they typically have lower interest rates, lower fees (which are also capped), and generally more favorable terms as they are controlled and backed by a government agency. They are generally heavily regulated to protect borrowers, which also makes them the safest reverse mortgage option.
However, a HECM reverse mortgage requires a mortgage insurance premium, and the FHA determines a cap on the loan amount every year.
Other Types of Reverse Mortgage
The other two types, the single-purpose reverse mortgage, and the proprietary reverse mortgage loan, aren’t as easy to find as they are not offered by most lenders.
Local government agencies or non-profits generally offer single-purpose reverse mortgages, and they can be the most affordable of the three. However, how you use your funds is limited to your agreement with the lender.
Proprietary reverse mortgages are sometimes called jumbo reverse mortgages, as they do not have a maximum loan amount. They may be suitable for people with highly valuable homes, but they do come with downsides, including higher interest rates and fees, fewer regulations and protections, and no counseling.
Reverse mortgages are sometimes used as a pretense for scams, and reverse mortgage loans are prone to this type of criminal behavior.
Bottom Line
You can qualify for a reverse mortgage if you are over the age of 62, own all or most of your home, have no delinquent federal obligations, and your home meets HUD and FHA standards.
If you’re nearing retirement and want to enjoy your own money, use it to cover repair costs, and improve your financial well-being, a reverse mortgage may be the best choice for you.
Contact Arnaiz Mortgage today to discuss your options with an experienced loan officer and experience advantages such as tailored mortgages, fast loan closing, and one-on-one service.Get in touch with us online or call us at (623) 806-4645 for straightforward, hassle-free reverse mortgage solutions.