Minimum Qualifications for a Reverse Mortgage
A reverse mortgage is the opposite of a regular mortgage. It is a loan where the lender pays you while you continue to live in your home. Like any other loan, you have to meet all reverse mortgage qualifications before you obtain this loan. There are three types of reverse mortgages, but the most popular is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA).
Private lenders also make a relatively small number of reverse mortgages. Their underwriting standards vary. Because FHA HECMs comprise all but a handful of reverse mortgages, we will focus on HECM qualifications for borrowers and the properties owned.
Reverse Mortgage Borrower Requirements
According to the FHA, all reverse mortgage borrowers must:
- Be 62 years of age or older
- Own the property outright or a considerable amount of equity in the property
- Occupy the property as their principal residence
- Not be delinquent on any federal debt
- Participate in a consumer information session given by a HUD-approved HECM counselor
- Meet minimum financial requirements
Let us look at each of these reverse mortgage requirements.
Age 62 Minimum Age
The first reverse mortgage requirement, attaining 62 years of age, generates many questions among Bills.com readers. The reverse mortgage age requirement refers to the youngest age of all property owners. Ownership is defined by the names that appear on the property’s title. If, for example, you are age 62 and the other owner is age 60, then you do not qualify for a reverse mortgage until the other owner attains age 62, or if the other owner’s name is removed from the title.
The second reverse mortgage requirement, “owning a considerable amount of equity in the property,” is also a confusing requirement. Equity is the appraised value of the property minus the amount of all loans secured by the property, if any. The amount of equity does not equal the amount a person can borrow. How much a homeowner can borrow depends on five factors, including:
- The age of the youngest person on the home’s title
- The type of reverse mortgage selected (more on this below)
- The home’s appraised value
- The amount of equity owned
- Current interest rates
In general, the older the owner, the higher the appraised value, and the less owed on any loans attached to the home, the more money the owner will get in a reverse mortgage. If there is any existing loan on the property, the owner must use the reverse mortgage proceeds to pay off the loan.
The third requirement, occupy the property, knocks out investment properties and vacation homes from reverse mortgage eligibility. If the borrower leaves the property to reside elsewhere, the loan becomes due.
Delinquent Federal Debt
The fourth requirement usually pertains to delinquent tax debt. Congress does not want people who have delinquent IRS debt to benefit from a reverse mortgage.
The fifth requirement is meant to address the problems faced by early reverse mortgage borrowers. In some cases, borrowers were mislead by unscrupulous lenders who failed to disclose all of the positives and negatives possible with a reverse mortgage.
Verify Borrower’s Finances
The lender must document and verify the borrower’s income, assets, monthly living expenses, and credit history. The lender must verify the timely payment of real estate taxes, and hazard and flood insurance premiums.
Reverse Mortgage Property Requirements
The FHA will insure three property types. All must meet FHA health and safety property standards and flood requirements. The following properties are eligible for HECM loans:
- Single family homes, or 2-4 unit homes with one unit occupied by the borrower
- HUD-approved condominium projects
- Manufactured homes that meet FHA requirements
Reverse Mortgage Amounts & Limits
The FHA caps the HECM authorized loan limit proceeds on homes valued more than $625,500. In other words, if the equity in your home is $1 million, the FHA will insure up to $625,500 even though your equity is considerably more. Given this upper limit on the FHA’s insurance, lenders will cap the amount they loan at $625,000. Borrowers can receive between 51% and 77% of the appraised home value (or FHA loan limit, whichever is less) in a reverse mortgage. However, this amount depends on the borrower’s age and if they choose a HECM Standard or a HECM Saver reverse mortgage. Click on the link just mentioned to learn more about these two reverse mortgage options.