Reverse mortgage requirements

Reverse mortgage age requirements

Age requirements are one of the most significant barriers to getting a reverse mortgage. Reverse mortgage age requirements technically depend on the type of reverse mortgage you decide to take out, but don’t expect to qualify if you’re not near traditional retirement age:

• Home equity conversion mortgages (HECMs) backed by the Federal Housing Administration are exclusively available to homeowners ages 62 or older. These are the most popular type of reverse mortgages, and they’re available through FHA-approved private lenders.
• Proprietary reverse mortgages don’t have to match the government’s standards because they’re offered without government backing. However, many proprietary reverse mortgage lenders impose their own age requirements close to or equal to the HECM age requirement.

Ownership status requirements

You must have significant equity in your home (usually more than 50%) to get a reverse mortgage. However, lenders prefer that you own your home outright, meaning you’ve paid off any mortgages on the property.

If you don’t own your home outright but receive a reverse mortgage offer, lenders mandate that you pay off any remaining mortgage balances on the property before using the funds for anything else. If necessary, the lender will disburse the exact amount necessary from your loan to pay off your remaining mortgage balances. Once you’ve paid those off, your lender should release the rest of the funds to you.

Reverse mortgage property requirements

Your property has to be in shape to qualify for a reverse mortgage. If the lender determines it's not, they will inform you of what repairs you must make before qualifying for a reverse mortgage.

Government-backed loans are subject to more stringent property requirements. The Department of Housing and Urban Development allows you to take out a HECM for several types of properties:

• Single-family homes
• Two- to four-unit multifamily properties (if you reside in one of the units)
• HUD-approved condominium projects
• Condominium units that meet FHA Single-Unit Approval requirements
• FHA-approved manufactured homes

Reverse mortgage occupancy requirements

The home for which you take out a reverse mortgage must be your primary residence, meaning you live there for most of the year every year. If you own a multiunit property, you must live in at least one of the units.

You cannot take out a reverse mortgage on a home where you don't live for more than half the year, including second homes and rental properties (unless you live in one of the rental property’s units). However, you may use your reverse mortgage proceeds against your primary residence to purchase one of these properties.

These occupancy requirements continue after you get your reverse mortgage. If you are married and die before your spouse, they must begin or continue occupying the home for the majority of the year in order to maintain the reverse mortgage after establishing proof of their legal right to stay in the home. If your spouse isn’t on your reverse mortgage, the loan may be due upon your death, even if your spouse still lives in the home.

Reverse mortgage credit requirements

There are no formal credit score requirements to qualify for reverse mortgages; lenders care more about your ability to keep up with expenses involved in maintaining your home. However, lenders will turn you down for a HECM if you’re delinquent on any federal debt, such as federal income tax debt or certain student loans.

Lenders will also examine your credit history. If they notice a trend of failure to make payments or debt defaults, they may require you to open a Life Expectancy Set-Aside (LESA) as part of your reverse mortgage agreement. A LESA is an account where you must put aside a fixed amount of funds to cover insurance, property taxes and maintenance/repair costs in case you become unable to pay for them over the reverse mortgage’s life.

The lender calculates your LESA deposit requirement based on your monthly insurance and property tax costs, your credit score/history, your income and the youngest borrower's life expectancy. Improving each of these areas should lower your LESA requirements.

Financing requirements

Once you get a reverse mortgage, the lender routinely adds interest and servicing fees to the loan’s balance. Your reverse mortgage can technically outgrow the value of your home. However, most reverse mortgages, including HECMs, are nonrecourse. This means that you or your heirs do not have to pay more than the value of the home if the reverse mortgage comes due.

You do not have to make monthly payments on a reverse mortgage, but you may have to pay it back before your death. If you move out of the home or it's no longer your primary residence, for instance, you must pay it back in full. Likewise, failing to pay insurance, property taxes, homeowners association fees and other relevant costs can also trigger repayment.

If you die and your spouse is not listed on the reverse mortgage as a borrower, your lender will seek repayment through your estate. However, heirs can usually repay a reverse mortgage by simply selling the home in question, and they won’t have to pay more than the value of the home due to the loan being nonrecourse.

Financial counseling

If you’d like to get a HECM, you must first attend counseling with a HUD-approved reverse mortgage counselor. Your counselor should explain the reverse mortgage’s costs and its implications for your finances. They should also introduce alternatives to a HECM, including other reverse mortgages and government and nonprofit aid programs. After showing you your options, the counselor can help you compare and contrast reverse mortgage fees and terms before you close on a loan.

Reverse mortgage counselors generally charge a fee for their services, although they cannot turn you away if you cannot afford the fee. In many cases, you can have the lender deduct the fee from your reverse mortgage proceeds.

Bottom line

Reverse mortgages can be an excellent option for older people that meet the above requirements. You can use the proceeds for retirement income or to buy a rental property, travel or fund your grandchildren’s education. If you don’t qualify for a reverse mortgage, there are plenty of other financial solutions that may meet your needs, including mortgage refinancing, home equity loans and annuities.