A reverse mortgage is a loan taken out against the value of your home. If you’re 62 or older and have significant net worth, you can borrow against the equity in your home and receive funds as a lump sum, fixed monthly payment, or line of credit. Unlike a term mortgage, the type used to buy a home, you won’t make any payments to your lender. Instead, the entire loan balance becomes due and payable when the borrower dies, moves permanently, or sells the home.
A reverse mortgage is a way to access the equity you’ve built up in your home during your retirement. Other options include a cash refinance or a home equity loan. Each of these financial products has different eligibility and qualification requirements. In this article, we’ll look at what you need to qualify for a reverse mortgage.
There are three types of reverse mortgages. The most common is the home equity conversion mortgage (HECM). The HECM accounts for nearly all of the reverse mortgages that lenders offer on home values below $970,800, so that’s what this article will cover. If your home is worth more, however, you might consider a Jumbo Reverse Mortgage, also known as a Homeowner Reverse Mortgage.
- Reverse mortgages have two main qualifying criteria: you must be at least 62 years old, and you must have a significant portion of the equity in your home.
- Although the specific percentage of equity required varies between lenders, you will generally need 50%.
- There are no credit score or income requirements for reverse mortgages.
- The US Department of Housing and Urban Development (HUD) requires all potential reverse mortgage borrowers to complete a HUD-approved counseling session.
- Borrowers must also pay an origination fee and an initial mortgage insurance premium.
- Although it is not technically necessary to obtain a reverse mortgage, you will have to pay property taxes and home insurance once you obtain the mortgage.
What does it take to get a reverse mortgage?
There are a number of requirements you must meet to qualify for a reverse mortgage. The most important of these relate to your age and the amount of equity you have in your home.
Reverse mortgages are designed to allow older homeowners with no other sources of retirement savings to access the equity they have accumulated in their home. For this reason, you must be at least 62 years old to qualify for a reverse mortgage. And if you want to add your spouse as a co-borrower (which you should do if you can), they must also be 62 years old.
You must also own a significant portion of the equity in your home, usually at least 50%. You must live in the property you are taking the reverse mortgage on and it must be a house, condominium, townhouse or manufactured home built on or after June 15, 1976 .
Under FHA rules, co-op homeowners can’t get reverse mortgages because they don’t technically own the real estate they live in, but rather own stock in a corporation. In New York, where co-ops are common, state law until recently prohibited reverse mortgages in co-ops, only allowing them in one- to four-family residences and condos.
In December 2021, Governor Kathy Hochul signed a bill allowing New Yorkers age 70 and older to take out reverse mortgages on their co-op apartments. The bill took effect in March 2022, and New York State residents can now qualify for two types of reverse mortgages for borrowers: federally insured HECMs or proprietary reverse mortgages.
Income and credit checks
Reverse mortgages have no income or credit score requirements. This is one of the ways reverse mortgages differ from a home equity loan or home equity line of credit (HELOC). HELOCs provide homeowners with access to the equity in their property. Unlike a reverse mortgage, home equity loans and HELOCs require borrowers to make payments, and to qualify you must have a respectable credit score. On the other hand, they may come with lower fees and may be a cheaper alternative to a reverse mortgage.
The US Department of Housing and Urban Development (HUD) requires all potential reverse mortgage borrowers to complete a HUD-approved counseling session. This counseling session, which typically costs around $125, should last at least 90 minutes and cover the pros and cons of taking out a reverse mortgage given your unique financial and personal circumstances.
The counselor will explain how a reverse mortgage could affect your eligibility for Medicaid and Supplemental Security Income (SSI), and should also review the different ways you can receive your reverse mortgage proceeds.
There are costs associated with setting up a reverse mortgage. Borrowers must pay an origination fee and an initial mortgage insurance premium. These fees are often paid out of the loan itself, which means you may not need savings to take out a reverse mortgage. It’s important to recognize, however, that the upfront costs of reverse mortgages are high, whether you’re paying for them out of your own pocket or from the equity you own.
Although it is not technically necessary to obtain a reverse mortgage, you will have to pay property taxes and home insurance once you obtain the mortgage. If you are behind on these payments or stop living in the home for more than a year, even if it is because you are living in a long-term care facility for medical reasons, then you will have to repay the loan, which is usually accomplished by selling the house.
There are other ways to access your home equity in retirement. These include a cash refinance or a home equity loan. Both have stricter qualifying requirements than a reverse mortgage, but both can be more profitable in the long run. You should check if you qualify for these other financial products before considering a reverse mortgage.
What to do if you are not eligible
If you don’t qualify for any of these loans, what are your options for using the equity in your home to fund your retirement? You could sell and downsize, or you could sell your house to your children or grandchildren to keep it in the family, maybe even become their tenant if you want to continue living in the house.
What’s stopping you from getting a reverse mortgage?
You must live in your home as your primary residence for the duration of the reverse mortgage and be at least 62 years old. Vacation homes or rental properties are not eligible. You must own your home or hold at least 50% of the equity in your home to qualify for a reverse mortgage.
What percentage of equity is needed for a reverse mortgage?
About 50% equity. To qualify for a reverse mortgage, borrowers must own their home or have significant equity. The specific percentage varies by lender and type of reverse mortgage, but the general rule is to have at least 50% of the equity in your home.
What are the three types of reverse mortgage?
There are three types of reverse mortgages: one-time reverse mortgages offered by some state and local government agencies, as well as non-profit organizations; proprietary reverse mortgages—private loans; and federally insured reverse mortgages, also known as home equity conversion mortgages (HECM).
Reverse mortgages have two main qualifying criteria: you must be at least 62 years old, and you must have a significant portion of the equity in your home. Although the specific percentage of equity required varies from lender to lender, you will generally need at least 50%. There are no credit score or income requirements for reverse mortgages.
The US Department of Housing and Urban Development (HUD) requires all potential reverse mortgage borrowers to complete a HUD-approved counseling session, and borrowers must pay an origination fee and an upfront mortgage insurance premium. And while it’s not technically necessary to get a reverse mortgage, you’ll have to pay property taxes and home insurance once you get the mortgage.