A reverse mortgage is a loan that can be taken out against the value of a home. Applicants for reverse mortgages must be at least 62 years old and have considerable home equity. Reverse mortgages allow homeowners to borrow against the value of their home and receive funds as a lump sum, fixed monthly payment, or line of credit. The loan balance becomes due and payable when the borrower dies, moves, or sells the home.
Key Takeaways
- Reverse mortgages require that applicants be at least 62 years old and own a significant amount of equity in their home.
- Applicants typically need 50% equity to qualify for a reverse mortgage.
- There are no credit score or income requirements for reverse mortgages.
- HUD requires all reverse mortgage borrowers to complete a counseling session.
Types of Reverse Mortgages
- Asingle-purpose reverse mortgageis offered by state, local, and nonprofit agencies and is the least expensive option.
- Home equity conversion mortgages (HECMs)are federally insured by the U.S. Department of Housing and Urban Development (HUD) and may carry high initial costs.
- Jumbo reverse mortgages are proprietary reverse mortgage loans that allow homeowners to borrow up to $4 million.
The most common type of reverse mortgage for U.S. homeowners is the HECM. In 2023, borrowers can access up to $1,089,300 with a Home Equity Conversion Mortgage.
Reverse Mortgage Requirements
Age
Reverse mortgages are designed to allow older homeowners without other sources of retirement savings to access the equity they’ve built up in their homes. Applicants and any co-borrowers, such as a spouse, must be at least 62 years old to qualify for a reverse mortgage.
Equity
Applicants must own a significant level of equity in their home, commonly 50%.The property must be a house, condominium, townhouse, or manufactured home built on or after June 15, 1976.
Under Federal Housing Authority (FHA) rules, cooperative housing owners cannot obtain reverse mortgages since they do not own the real estate in which they live but rather own shares of a corporation. New York, where co-ops are commonplace, once prohibited reverse mortgages in co-ops. As of 2022, the state allows them only in one- to four-family residences and condos as HECMs insured by the federal government or proprietary reverse mortgages.
Income and Credit
Reverse mortgages do not have income or credit score requirements and differ from a home equity loan or a home equity line of credit (HELOC). Both loans provide homeowners access to home equity, but home equity loan and HELOC applicants are reviewed for income and credit score and required to make monthly payments if approved.
Counseling
Reverse mortgage applicants for an HECM must complete a counseling session sponsored by the U.S. Department of Housing and Urban Development (HUD). This counseling session instructs borrowers on the pros and cons of taking out a reverse mortgage, how to access funds and the effects of the loan on Medicaid and Supplemental Security Income (SSI) eligibility.
Costs
Borrowers must pay an origination fee and an up-front mortgage insurance premium. These costs can be paid from the loan disbursem*nt. The up-front costs of reverse mortgages are high, and borrowers must decide to pay out of pocket or from the equity of the property.
Consequences
Borrowers will continue to pay for property taxes and homeowners insurance with a reverse mortgage. If these payments are missed, or the borrower moves to a long-term care facility for medical reasons, the loan must be repaid, which is usually accomplished by selling the house.
A reverse mortgage is one way of accessing the equity you’ve built up in your home during retirement. Other options include a cash-out refinance or a home equity loan.
What Disqualifies Applicants From Getting a Reverse Mortgage?
Borrowers must live in the home as their primary residence for the life of the reverse mortgage and be at least 62 years old. Vacation homes or rental properties are not eligible.
What Percentage of Equity Is Needed for a Reverse Mortgage?
To qualify for a reverse mortgage, borrowers must own their home outright or have significant equity, commonly 50%. The specific percentage varies by lender and the type of reverse mortgage.
What Is the Most Common Type of Reverse Mortgage?
The Home Equity Conversion Mortgage (HECM) represents almost all of the reverse mortgages that lenders offer.
The Bottom Line
Reverse mortgages allow homeowners to access the equity in their homes during their retirement years. Applicants must be at least 62 years old and own a significant amount of equity in their home. There are no credit score or income requirements for reverse mortgages.
