What disqualifies you from getting a reverse mortgage?

If you are interested in applying for a reverse mortgage, there are certain requirements you must meet to qualify for the loan. These requirements may be grouped into personal, property, and financial requirements. If you don’t meet at least one of these requirements, your application may be denied.

You may be disqualified from getting a reverse mortgage if you are below age 62, you have less than 50% equity in your home, or you don't have enough income or assets to afford the ongoing costs such as property taxes and homeowner insurance. You may also be disqualified if your home is in disrepair, you have delinquent federal debts, or you have not completed a HUD-approved counseling session.

What disqualifies you from getting a reverse mortgage?

With reverse mortgages becoming more popular over the years, the eligibility rules have changed, making it harder for potential borrowers to qualify. The new federal rules that were introduced in 2015 allowed the Federal Housing Administration (FHA) to modify the eligibility rules for reverse mortgages.

The new rules allowed reverse mortgage lenders to conduct a financial assessment on borrowers to review the income, cash flows, and credit reports before approving a reverse mortgage application. This made reverse mortgage approvals stricter, and homeowners must meet various requirements to tap into their home equity.

Some of the reasons why you may be disqualified from getting a reverse mortgage include:

You are below the minimum required age

Reverse mortgages are designed to allow senior homeowners age 62 or older to access the equity they have built in their homes to supplement their incomes in retirement. If you are below age 62, you won’t qualify for a reverse mortgage. You may still be eligible to take other types of loans such as a home equity line of credit against your home equity.

The property is not your primary residence

The property you use to take a reverse mortgage must be your primary residence, where you live for the majority of the year. If your property does not meet the criteria for a “primary residence”, you may be disqualified from getting a reverse mortgage.

You have less than 50% equity

To qualify for a reverse mortgage, you must own your primary residence outright or have at least 50% equity in your home. This means you must have repaid your conventional mortgage fully or have a low mortgage balance. The equity you have built in your home is the security of the reverse mortgage.  

You have not completed a counseling session

If you are applying for a federally-insured reverse mortgage, you must complete a counseling session with a HUD-approved counselor. The session helps you know the pros and cons of the reverse mortgage, the various disbursement options, and reverse mortgage alternatives. You will receive a counseling certificate at the end of the session. If you did not complete a counseling session, it could be the reason why your reverse mortgage application was denied.

The property is in disrepair

Since your home is the collateral for the reverse mortgage, it must be in good condition and be current on all repairs. The lender will conduct an appraisal to determine its condition and the current market value of the home.

Your home may be considered to be in disrepair if it has a leaking roof, structural cracks, faulty heating, faulty air conditioning system, pest infestation, faulty electronics, faulty plumbing, damaged doors, failed window glazing, etc. If the appraiser finds that your home is unsuitable for occupation, you will be required to fix the repairs before the lender can act on your application.

Once you have fixed the required repairs, the lender may request a second appraisal to confirm if the property complies with HUD Health and Safety standards.

You have not paid mortgage insurance

Before you get approved for a reverse mortgage, you may be required to pay certain mortgage costs. One of these costs is mortgage insurance, which reduces the lender’s risk if you default on payments, pass away, or property declines in value. The mortgage insurance is usually about 2% of the reverse mortgage amount. You may be required to pay this cost out-of-pocket or roll it into your loan if the lender allows it.

Federal debt

To be eligible for a reverse mortgage, you cannot be delinquent on any federal debts such as federal student loans or federal income taxes. Some lenders may, however, approve your reverse mortgage application if you use the loan proceeds to pay off any delinquent federal debt.

You’ve failed the lender’s financial assessment

Once you apply for a reverse mortgage, the lender performs a financial assessment to determine if you have enough incomes or assets to pay ongoing homeownership costs, including property taxes, and homeowner insurance.

The lender reviews your income such as Social Security, pension, 401(k) distributions, rental income, and investments to know how much you earn. The lender may also check your credit report to review your payment history and delinquent debts.

If the lender determines that you have insufficient income to afford the ongoing costs, or you have defaulted on debts before, your reverse mortgage application could be denied.

What if you don’t qualify for a reverse mortgage?

Here are some of the options you have if are disqualified from getting a reverse mortgage:

Wait

If you got disqualified from getting a reverse mortgage due to age, you should delay your application until you reach the minimum required age i.e. age 62 or older. Also, if your application is denied due to low equity, you can wait until you have built enough equity to be eligible for a reverse mortgage.

Downsize

If you are struggling with mortgage payments or living expenses, you can move to an affordable house and sell your current home. This will allow you to pay off current debts, and have surplus cash left to spend.

Refinance

If the current interest rates are lower than what you are paying on your mortgage, you can take a refinance mortgage to lock in the low-interest rate and lower your monthly mortgage payments. You can also consider a cash-out refinance, which allows you to take a higher mortgage amount than your current mortgage balance so that it is enough to pay off the current mortgage and take a cashout at closing.

Take a home equity loan

If your net worth is tied to your home, you can take a home equity loan or a home equity line of credit against your home equity. These loans allow borrowers to use their homes as collateral and access a lump sum payment. However, these loans may carry some risks, and you should only borrow what you need to avoid owing too much debt.