For many seniors, the home they raised their family in serves as a nest egg that can help cover the cost of their retirement. However, more homeowners than ever wish to age in place and live out the rest of their lives in the home they love. A reverse mortgage (or another form of home equity financing) can help – but not all homeowners qualify. Let’s talk about what disqualifies you from getting a reverse mortgage.
How does a reverse mortgage work?
There is more than one type of reverse mortgages on the market, but for the purpose of this article, we will talk about two main categories: home equity conversion mortgages (HECMs), and proprietary reverse mortgages (also known as jumbo reverse mortgages).
With any reverse mortgage, borrowers get cash, which can come in a lump sum, a line of credit, or an installment plan. Instead of making a monthly payment, the loan balance grows over time and repaid when no one on the home’s title is living in the home as a primary residence, the property is sold, or the homeowner defaults.
HECMs are a more standardized product, while proprietary reverse mortgages tend to come with a variety of loan terms, depending on the lender. One major difference is the maximum eligible home value and loan amount – jumbo reverse mortgages accommodate more valuable properties.
What disqualifies you from getting a reverse mortgage?
Let’s dive into discussing what disqualifies you from getting a reverse mortgage.
Your age
The first thing that comes to mind when it comes to reverse mortgage qualifications is age – homeowners must be age 62 or older to qualify. Additionally, the older you are, the more of your home equity you are eligible to unlock. Some proprietary reverse mortgages are available starting from age 60 or lower, but this depends on your state’s rules.
The property is not your primary residence
You can only get a reverse mortgage on your primary home – in fact, for homeowners with a reverse mortgage, leaving a property for too long (including for longterm medical care) can force repayment.
You have insufficient equity
A reverse mortgage needs to be in first lien position, which means you need to either already have paid off your first mortgage, or you need to be able to pay off your mortgage in its entirety with your reverse mortgage proceeds.
The property is not in good condition
One ongoing requirement of a reverse mortgage is keeping the home in good condition, which means the property needs to start out in good condition. Some of these requirements are set out by the department of housing, and some vary lender-by lender. If your property is in poor condition when you apply for a reverse mortgage, your lender may tell you what you need to do in order to qualify.
Your property type is ineligible
In order for you to qualify for a reverse mortgage, your property must also be eligible. Single family homes, certain condos, certain manufactured homes, and properties of up to four units (as long as the homeowner occupies one of the units) can qualify. In order to be eligible, a condo or a manufactured home has to be approved by HUD or be FHA eligible.
You have federal debt
If you owe federal tax debt or have a federal student loan, you cannot move forward with a federally-backed reverse mortgage. In some cases, you may be able to get your loan if you repay your federal debt using the loan proceeds.
You have yet to complete a mandatory counseling session
In order to make sure you understand how a reverse mortgage works, you’ll have to complete a counseling session with a counselor who is approved by the Department of Housing and Urban Development (HUD). This is a requirement for moving forward with a HECM and also many proprietary reverse mortgages – until you attend your counseling session, you won’t even be able to complete your application.
The lender deems you financially ineligible
While a reverse mortgage lender will generally not disqualify you for factors such as your credit score and debt-to-income ratio, your financial health and credit history may still be considered. This is because your lender needs to feel confident that you can pay your property taxes and cover to cost of your home’s upkeep and maintenance. If they do not think you can afford these obligations, they will not move forward.
What should you do if you don’t qualify for a reverse mortgage?
Now that we’ve covered the basics of what disqualifies you from getting a reverse mortgage – let’s talk about some alternative options if you do not qualify for a reverse mortgage or are not fully comfortable with this financial tool.
Wait
If you do not qualify for a reverse mortgage based on either your age or your mortgage balance, it may make sense to wait a few years and try again. While this will not satisfy an urgent need for funds, this may be a viable solution if you feel that a reverse mortgage is the best option for covering your retirement costs.
Consider a home equity investment
A home equity investment (HEI) is a home equity solution that has some similarities (and some key differences) with a reverse mortgage. HEIs are tied to the value of your home. Homeowners receive funds in a lump sum today in exchange for a share of the property’s value before the end of the term.
Like a reverse mortgage, an HEI has:
- No monthly payments
- No income requirements
- No need for perfect credit (500+ may be eligible)
Unlike a reverse mortgage, an HEI has:
- No minimum age requirement
- No need to pay off your first mortgage
- No acceleration upon death or primary residence requirement
Downsize
If you are relying on your home equity nest egg to cover retirement costs but cannot qualify for a reverse mortgage or another alternative, downsizing may be the right option. By moving into a smaller home, perhaps in a lower cost-of-living area, you can turn a portion of your home equity into liquid funds.
Explore a home equity loan or home equity line of credit (HELOC)
If you have a steady income in retirement, but are looking for a large lump sum (or line of credit) to renovate your home or cover a one-time cost, a traditional home equity loan or HELOC may work for your needs.
Unlike a reverse mortgage, you’ll need the following to qualify for a home equity loan:
- A steady income
- A good credit score
- The ability to make a monthly payment
However, there are no age limits, no counseling requirements, and the variety of lenders available means that well-qualified borrowers can generally find someone to work with for a range of property types.
Refinance
If you still have a first mortgage, you may be able to cover your financial needs with a cash-out refinance. When you get a cash-out refinance, you replace your existing loan with a larger one and pocket the difference.
Unlike a reverse mortgage, you’ll need:
- Sufficient income to cover your larger loan
- Decent-to-good credit and debt-to-income ratio
However, you need far less home equity to qualify, and there are no age restrictions. Whether it makes sense to investigate a cash-out refinance is largely determined by the interest rates today and how they compare to interest rates when you took out your current home loan.
Final thoughts
Now that you know what disqualifies you from getting a reverse mortgage, you should have a better idea of whether or not it makes sense to move forward and start looking for a reverse mortgage lender. If a reverse mortgage is not the best option for you, consider seeing if you qualify for an HEI from Point. HEIs are assumable, have no age restrictions, no residency requirements, and no monthly payments.
