A reverse mortgage is a loan against the value of your home. If you’re 62 or older and have significant home equity, you can borrow against the value of your home and receive funds as a lump sum, a fixed monthly payment, or a line of credit. Unlike a term mortgage, the type used to buy a home, you will not make any payments to your lender. Instead, the entire loan balance is due and payable when the borrower dies, permanently moves, or sells the home.
A reverse mortgage is a way to access the equity in your home during retirement. Other options include a cash-out refinancing or a home equity loan. Each of these financial products has different eligibility and qualification requirements. In this article, we’ll take a look at what you need to qualify for a reverse mortgage.
There are three types of reverse mortgages. The most common is the Home Equity Conversion Mortgage (HECM). The HECM accounts for nearly all reverse mortgages lenders offer on home values under $970,800, so that’s what we’ll discuss in this article. However, if your home is worth more, you may want to consider a jumbo reverse mortgage, also called a reverse property mortgage.
- Reverse mortgages have two main qualifying criteria: You must be at least 62 years old, and you must have a significant amount of equity in your home.
- While the specific percentage of equity required varies among lenders, you’ll typically need 50%.
- There are no credit scores or income requirements for reverse mortgages.
- The US Department of Housing and Urban Development (HUD) requires all prospective reverse mortgage borrowers to complete a HUD-approved counseling session.
- Borrowers must also pay an origination fee and a mortgage insurance premium up front.
- While not technically a requirement to obtain a reverse mortgage, you will need to pay property taxes and property insurance once you have the mortgage.
What is required to obtain a reverse mortgage?
There are a number of requirements that you must meet to qualify for a reverse mortgage. The most important ones relate to your age and the amount of equity you have in your home.
Reverse mortgages are designed to allow older homeowners without other sources of retirement savings to access the equity they have built up in their home. Because of this, you must be at least 62 years old to qualify for a reverse mortgage. And if you want to add your spouse as a co-borrower (which you should if you can), you must also be 62 years old.
You must also own a significant level of equity in your home, usually at least 50%. You must live in the property you are taking out the reverse mortgage against, and it must be a house, condominium or townhouse, or a manufactured home built on or after June 15, 1976.
Under FHA rules, cooperative homeowners can’t get reverse mortgages because they technically don’t own the real estate they live in, but instead own shares in a corporation. In New York, where co-ops are common, state law until recently prohibited cooperative reverse mortgages, allowing them only on one- to four-family residences and condominiums.
In December 2021, Governor Kathy Hochul signed a bill allowing New Yorkers over the age of 70 to obtain reverse mortgages on their cooperative apartments. The bill went into effect in March 2022 and New York State residents can now qualify for two types of reverse mortgages for borrowers: federally insured HECM or proprietary reverse mortgages.
Income and credit checks
Reverse mortgages have no income or credit score requirements. This is one of the ways reverse mortgages differ from a home equity loan or home equity line of credit (HELOC). HELOCs provide homeowners with access to home equity. Unlike a reverse mortgage, home equity loans and HELOCs require borrowers to make payments, and to qualify, you must have a respectable credit score. On the other hand, they may have fewer fees and may be a less expensive alternative to a reverse mortgage.
The United States Department of Housing and Urban Development (HUD) requires all prospective reverse mortgage borrowers to complete a HUD-approved counseling session. This counseling session, which usually costs around $125, should take at least 90 minutes and cover the advantages and disadvantages of taking out a reverse mortgage given your unique financial and personal circumstances.
The counselor will explain how a reverse mortgage could affect your eligibility for Health insurance and Supplemental Security Income (SSI), and you should also review the different ways you can receive your reverse mortgage proceeds.
There are costs associated with setting up a reverse mortgage. Borrowers must pay an origination fee and a advance mortgage insurance cousin. These costs are often paid out of the loan itself, which means you may not need any savings to get a reverse mortgage. However, it’s important to recognize that the upfront costs of reverse mortgages are high, whether you pay for them out of pocket or from equity you own.
While not technically a requirement to obtain a reverse mortgage, you will need to pay property taxes and property insurance once you have the mortgage. If you fall behind on these payments or leave the home for more than a year, even if it’s because you live in a long-term care facility for medical reasons, then you’ll have to pay back the loan. which is usually achieved by selling the house.
There are alternative ways to access the equity in your home in retirement. These include a cash-out refinance or a home equity loan. Both have more stringent qualification requirements than a reverse mortgage, but both can be more profitable in the long run. You should check to see if you qualify for these other financial products before considering a reverse mortgage.
What happens if you don’t qualify?
If you don’t qualify for any of these loans, what options are left to use? home equity to finance your retirement? You could sell and downsize, or you could sell your house to your children or grandchildren to keep it in the family, perhaps even becoming your tenant if you want to continue living in the house.
What disqualifies you from getting a reverse mortgage?
You must live in your home as your primary residence for the life of the reverse mortgage and be at least 62 years old. Vacation homes or rental properties are not eligible. You must own your home outright or have at least 50% equity in your home to be eligible for a reverse mortgage loan.
What percentage of capital is needed for a reverse mortgage?
About 50% of the share capital. To qualify for a reverse mortgage, borrowers must own their home outright or have significant equity. The specific percentage varies by lender and reverse mortgage type, but the general rule of thumb is to have at least 50% equity in your home.
What are the three types of reverse mortgage?
There are three types of reverse mortgages: single-purpose reverse mortgages offered by some state and local government agencies, as well as non-profit organizations; proprietary reverse mortgages—private loans; and federally insured reverse mortgages, also known as home equity conversion mortgages (HECMs).
The bottom line
Reverse mortgages have two main qualifying criteria: You must be at least 62 years old, and you must have a significant amount of equity in your home. While the specific percentage of equity required varies among lenders, you’ll typically need at least 50%. There are no credit scores or income requirements for reverse mortgages.
The US Department of Housing and Urban Development (HUD) requires all prospective reverse mortgage borrowers to complete a HUD-approved counseling session, and borrowers must pay an origination fee and mortgage insurance premium up front . And while it’s not technically a requirement to get a reverse mortgage, you’ll need to pay property taxes and property insurance once you have the mortgage.