What cannot be included on a reverse mortgage?

A reverse mortgage creates an extra source of income for homeowners above 62 years. Usually, if you have built at least 50% equity in your home, you can take a reverse mortgage, and use the funds to pay for medical expenses, home repairs, or even pay the existing mortgage. However, a reverse mortgage is not everyone, and not all applicants get approved for a reverse mortgage.

Reverse mortgages do not cover certain types of homes. Some of the homes that may not qualify for reverse mortgages include mobile homes, cooperatives, second homes (including vacation homes), and multifamily homes with more than four units. Typically, the home must be permanently attached to land to be covered by a reverse mortgage. Also, you must use the home as your primary residence where you spend the majority part of the calendar year.

Homes that do not qualify for a reverse mortgage

Reverse mortgage lenders have certain restrictions on the type of homes that qualify for reverse mortgages. Here are homes that reverse mortgages do not cover:

Second homes

Reverse mortgages were designed to provide a source of income for homeowners aged 62 or older, and living in their primary residence. Second homes and vacation homes are not covered by reverse mortgages. You must use the home for the majority of the calendar year, usually at least 183 days annually, for the home to be considered a primary residence.

Co-ops

Co-operatives are similar to apartments, but the residents own shares of the property instead of the property itself. Usually, these types of homes are owned by corporations and managed by a board. Since the home is not secured by real property, this type of home is not covered by a reverse mortgage.

Mobile home

A reverse mortgage requires that for a home to qualify for coverage, it must be permanently attached to the land. Since mobile homes are not affixed permanently to the land, they are not eligible for a reverse mortgage. However, manufactured homes that are affixed to a permanent foundation may be eligible for coverage.

Multifamily homes with more than 4 units

Multi-family homes that have up to 4 units, including duplexes, triplexes, and quadruplexes may qualify for a reverse mortgage if at least one of the units is used as the primary residence. However, multifamily homes with more than four units are considered commercial properties, and hence not eligible for reverse mortgages. Reverse mortgages only consider residential properties and not commercial properties.

What disqualifies you from getting a reverse mortgage?

When you apply for a reverse mortgage, the lender can reject your application if you don’t meet certain requirements. If your application has been denied, here are some common reasons why you don’t qualify for a reverse mortgage:

You don’t meet the age criteria

If you are applying for a Home Equity Conversion Mortgage (HECM), you must meet the minimum age requirements established by the US Department of Housing and Urban Development (HUD) i.e. at least age 62 or older. If you are a few years away from reaching age 62, you should wait until you reach the minimum age to reapply for a reverse mortgage.

The property does not qualify

For a property to qualify for a reverse mortgage, it must be your primary residence, be in good condition, and meet HUD’s property eligibility requirements. If the property is a second home, vacation home, or mobile home with no permanent foundation, you won’t be eligible for a reverse mortgage.

You don’t meet the financial requirements

When you apply for a reverse mortgage, the lender conducts a financial assessment to determine if you have sufficient assets or income to afford the costs of owning a home such as property taxes, property maintenance, homeowner insurance, etc. If you can’t afford these costs, your reverse mortgage application will be denied. Additionally, you must be current on any federal debts or prove the ability to pay in full at closing with the loan proceeds.

Not having sufficient equity in the home

Your borrowing limit depends on the amount of equity in your home. HUD requires that you must own your home outright or have paid a considerable amount of the existing mortgage. If you own your home outright, it means you have 100% equity. However, if you are still paying your existing mortgage, you must have at least 50% equity in your home.

Does bad credit affect reverse mortgages?

Unlike traditional mortgages, there is no minimum credit score requirement to qualify for a reverse mortgage. Lenders will require you to prove your ability to continue paying costs associated with owning your home and maintaining the property.

As part of the financial assessment, lenders will conduct a credit check to know your history of making timely bill payments and to determine if you have adequate financial resources to meet your financial obligations. As such, the lender will look at your sources of income like Social Security benefits, pension, military retirement pay, and investments to know your ability to meet financial obligations.

If a credit check shows you have delinquent federal debts or you have defaulted on bill payments, you may be required to set up a Life Expectancy Set Aside (LESA). LESA is an account where you are required to deposit a specific amount of money to cover property taxes, homeowner insurance, and other homeownership costs so that the lender can use these funds if you default on paying homeownership costs. The amount you need to deposit to LESA depends on your credit status, income, property taxes, and insurance costs.