You need to have a certain amount of equity in your home before you can take out a reverse mortgage. The amount you will need will vary by lender, but typically, you must have at least 50% equity in your home, and sometimes more. Learn more about how reverse mortgages work and the requirements for getting one.
Key Takeaways
- You must meet equity requirements to borrow against and secure a reverse mortgage.
- Equity requirements for a reverse mortgage vary by lender, but you generally must have at least 50% of equity in your home.
- The U.S. Department of Housing and Urban Development (HUD) says you must own your home outright or have a “considerable amount” of the mortgage paid.
- Your age is a factor in how much you can borrow.
How a Reverse Mortgage Works
A reverse mortgage is a mortgage that allows homeowners over the age of 62 to borrow money by using the equity in their primary residences as collateral. Equity is a portion of the value of the home that you own. It's essentially the home's value minus what you owe a mortgage lender.
With a reverse mortgage, you take out a loan and use your equity to back the loan, lowering the lender's risk. Instead of making payments to the bank like a traditional mortgage, the lender pays you in monthly installments, a lump sum, or a line of credit with a reverse mortgage.
The reverse mortgage is paid when you sell the home or pass away and your heirs sell the house.
There are three main types of reverse mortgages:
- HECMS: Home equity conversion mortgages (HECMs) are insured by the Federal Housing Administration (FHA) and require mortgage counseling. HECMs are the most common type of reverse mortgages, with the most definable standards.
- Proprietary reverse mortgages: Proprietary reverse mortgages are offered by private lenders. They lack the regulation of an HECM and are not insured by the federal government, but provide more options for those with high-value homes.
- Single-purpose reverse mortgages: Single-purpose reverse mortgages are typically offered by state and local governments or nonprofits to low-income homeowners who need to pay for home repairs or property taxes.
Your equity is affected by how much you have paid on your current house and how much the house is worth. If you’re still paying your mortgage and your house has appreciated with a strong housing market, your equity will be higher.
Finding Your Equity
Since reverse mortgages borrow against the equity you’ve built in your home, you must know how much equity you have. Part of the application process for an HECM is an appraisal to find your home’s current worth.
Once the house’s market value is determined, you can subtract what you owe a mortgage lender or the total amount of liens against the property. If you own your home outright and have no mortgage or liens, you would have 100% equity.
Variable Equity Standards
How much equity is required to qualify for an HECM may vary by lender, but you must have substantial equity. One standard rule of thumb is that you need 50% equity in your home to qualify for a reverse mortgage.
The U.S. Department of Housing and Urban Development (HUD) offers general guidance for equity requirements. According to HUD, you must own the home outright or have paid down a “considerable amount.” The amount of equity is only one portion of the qualifying stipulations for approval, with your age and record of financial responsibility also factoring in.
FHA-approved lenders consider many factors when determining how much money you can access. Regardless of equity, HUD caps the amount of money anyone can borrow at $1,149,825 for 2024.
Alternatives to Reverse Mortgages
If you don't have sufficient equity in your home or you can't qualify for a reverse mortgage for other reasons, you do have alternatives to consider. The right solution for you will depend on several personal factors, such as your age, income, and credit status.
You can use equity in your home to take out a home equity loan or a home equity line of credit (HELOC). Both loan types use your home equity as collateral to provide you with funds, but they work in different ways. A home equity loan will provide a lump sum that you repay in regular payments, similar to a personal loan. A HELOC works more like a credit card, extending you a line of credit that you can use repeatedly.
Like with reverse mortgages, equity requirements for home equity loans and HELOCs vary by lender, but you generally need an equity cushion of about 15% equity. So, you can usually borrow up to 85% of the value of your home, minus your mortgage debt.
How Much Can I Borrow Through a Reverse Mortgage?
The amount you can borrow with a reverse mortgage is based on your age, interest rate, and the house's appraised value or the home equity conversion mortgage (HECM) limit set by the Federal Housing Administration (FHA), whichever is lower. This will vary for each person. Older people can typically borrow more money.
How Do I Determine My Equity?
Equity is determined by the current appraised value of your home minus the amount that you owe on the house. Since home values vary based on market conditions, your equity can increase or decrease based on the appraised value of your home. In a period of high housing values, your equity will increase despite your payments staying the same. Conversely, in a housing crash, your equity may go down as your investment—your home—loses value.
What Happens to Leftover Equity When My Home is Sold?
If you have a reverse mortgage on your home and don’t use all of the equity before you pass away or move out, then you or your heirs can keep the remaining equity after the home sale as profit. If you expend beyond all of the equity, that amount is paid by mortgage insurance premiums. You cannot owe more than the home is worth with an HECM.
How Do Interest Rates Affect a Reverse Mortgage?
The lower the interest rate, the more money you can borrow with a reverse mortgage. Since the interest will be paid when the home is sold to repay the reverse mortgage, this will avoid expending all the equity in the house before you move or pass away.
What Would Disqualify Me From a Reverse Mortgage?
You can be disqualified from a reverse mortgage if you don't have enough equity in your home. You generally need at least 50% equity in your home to use this financing tool. You can also be disqualified if you don't meet the age requirement, which is 62 years and above.
The Bottom Line
Having equity in your home is a valuable asset in your retirement years, especially if you’re interested in a reverse mortgage. Reverse mortgages are only available to seniors and you need to have significant equity built up. If you purchased your home recently and don’t have enough equity, other tools, such as a home equity line of credit (HELOC), might be better.
