What do you need to qualify for a reverse mortgage?

For senior homeowners looking to establish a rainy day fund, a reverse mortgage can be a great option. You can borrow against your home’s equity, and receive funds as a lump sum, installment payments, or line of credit. However, this financial product is not for everyone, and certain requirements must be met to be eligible for a loan.

To qualify for a reverse mortgage, you must be at least age 62 or older, own the home outright or have a low mortgage balance, use the home as your primary residence, and have sufficient income to afford the property maintenance costs, property taxes, and homeowner insurance costs. Also, the home can be a single-family home or up to a four-unit family home with at least one unit being your primary residence.

Reverse mortgage basics

If you are interested in tapping into your home equity to get an extra source of income, a reverse mortgage can be a good option. A reverse mortgage allows senior homeowners to convert part of the equity in their home into cash. You can use the loan proceeds you receive from a reverse mortgage to pay off your current mortgage balance and use the remaining money for any purpose. You can pay for home improvements, buy a car, pay medical bills, etc.

A reverse mortgage does not require borrowers to make monthly mortgage payments, but they are still responsible for ongoing homeownership costs including property taxes, homeowner insurance, and home maintenance costs. The reverse mortgage will only become due when you have a qualifying event. However, if you fail to keep up with the ongoing costs, the lender may foreclose on your home.

Types of Reverse Mortgages

When taking a reverse mortgage, you may have a choice between the three types of reverse mortgages. The Home Equity Conversion Mortgage (HECM) is the most popular type of reverse mortgage since it is insured by the federal government and has better loan terms.

Proprietary reverse mortgages, also known as jumbo reverse mortgages, are available through private lenders and they are not insured by the government. A single-purpose reverse can only be used for a specific purpose, and they are backed by state and local governments as well as non-profits.

Reverse mortgage requirements

You must meet the following requirements to qualify for a reverse mortgage:

Age requirements

If you are borrowing a HECM loan, you must be at least age 62 or older to get approved for a loan. Proprietary reverse mortgages require borrowers to be at least age 62 or older, but some private lenders may approve homeowners as young as age 55.

If your spouse is above age 62, they can be added to the reverse mortgage agreement as co-borrowers. However, if you are above 62 but your spouse is below the required age, you can still be eligible for a reverse mortgage but the spouse will be considered a non-borrowing spouse. If you pass away, eligible non-borrowing spouses can continue living on the property. However, if the spouse is an ineligible non-borrowing spouse, the lender may initiate a foreclosure process unless they agree to pay off the mortgage.

Financial requirements

One of the important requirements of reverse mortgages is that the borrower must continue paying property taxes, homeowner insurance, and property maintenance expenses. Therefore, if you are applying for a reverse mortgage, you must demonstrate your ability to continue paying these expenses. If you fall back on payments, the loan could become due and payable, and the lender could move to foreclose on your home.   

To ensure you can afford these costs, the lender will conduct a financial assessment to determine if you can keep up with the ongoing reverse mortgage costs. If the lender doubts your ability to afford these costs, you may be required to set aside part of the loan proceeds in a Life Expectancy Set Aside (LESA) to pay for these costs. LESA acts as a holding account, from which the ongoing costs will be paid.

HECM borrowers are required to attend a counseling session with a third-party HUD-approved counseling agency. This counseling session lasts about one to four hours, and you will be required to pay for it. During the session, you can discuss the eligibility requirements, how reverse mortgages work, the financial implications of the loan, the benefits of reverse mortgages, and the alternatives you have to a reverse mortgage.

Property requirements

To qualify for a reverse mortgage, your property must meet these requirements:

The home must be your primary residence where you spend the majority of the year.

You must own the home outright or have a low mortgage balance that you can pay with proceeds from the reverse mortgage.

The property can be a single-family home or up to a four-unit multiple family home with at least one unit occupied by you as the primary residence.

The property must be in good condition, and repairs must be up-to-date. In some cases, the lender may require repairs to be completed before the mortgage application can move to close.

Can you be disqualified from getting a reverse mortgage?

You can be denied a reverse mortgage if you don’t meet the age, financial, and property requirements. Here are common reasons why you may be disqualified from getting a reverse mortgage:

You don’t meet the age requirement

If you and your spouse are below age 62, your reverse mortgage application will be denied. The age restriction applies to FHA-insured reverse mortgages.

You don’t meet the financial requirements

If the lender determines through a financial assessment that you can't afford to pay property taxes, insurance costs, and repairs, it can deny your application. Also, you must be current on federal debts such as student loans and income taxes or be able to pay off these debts at closing.

The property does not qualify

If the property used as collateral for the loan is not your primary residence, is in disrepair, or does not meet HUD’s health and safety standards (PDF), your application could be denied. Also, second homes such as vacation homes are not eligible for reverse mortgages.

You don’t have enough equity

You must have at least 50% equity in your home to qualify for a reverse mortgage. However, if you still have a big mortgage balance, you may not have sufficient equity to qualify for a reverse mortgage. Even if you qualify, the amount you would receive through the reverse mortgage may not be enough to pay off the current mortgage balance.