What percentage can you borrow on a reverse mortgage?

If you want to access the equity in your home without having to make regular mortgage payments, you may consider getting a reverse mortgage. Unlike a traditional mortgage, a reverse mortgage does not require you to make mortgage payments, but you receive payments from the lender. However, the amount you can borrow on a reverse mortgage is capped at a specific percentage. 

The percentage that you can borrow on a reverse mortgage typically ranges from 40% to 60% of the value of your home. Typically, the percentage you can borrow on a reverse mortgage depends on the value of your home and your age. Therefore, the more your home is worth, the more money you can borrow through a reverse mortgage. You must be 62 or older to be eligible for a reverse mortgage. 

How a reverse mortgage works

If you are an older homeowner with a lot of equity in your home, you can tap into the accumulated home equity using a reverse mortgage. Usually, when you take a reverse mortgage, you will receive payments from the lender (instead of making mortgage payments to the lender). You can choose to receive reverse mortgage payments as a lump sum payment, fixed monthly payments, or as a line of credit. Usually, the homeowner is not required to make loan payments during their lifetime.

The interest on the reverse mortgage is added to the loan balance, and it is paid alongside the principal when you sell your home. The homeowner is required to pay maintenance expenses of the property, property taxes, and homeowner insurance. The homeowner retains the title. During the loan term, the homeowner’s debt will increase as the home equity declines.

When the homeowner dies or the home is sold, part or all of the sale proceeds go towards paying the reverse mortgage principal, interests, and other fees. Any excess proceeds beyond what the homeowner had borrowed are paid to the homeowner or their estate if the homeowner died.

Types of Reverse Mortgages

Homeowners can choose from the following three types of reverse mortgage loans.

Home Equity Conversion Mortgages

The Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage, with no income restrictions or medical requirements. Since the HECM loan is backed by the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD) can provide insurance for it. 

You can use the loan to make home improvements, pay off debt, or supplement retirement income. It also has lower interest rates. One major drawback of HECM loans is that they typically have high upfront costs and are likely to be more costly than traditional home loans.

Single-Purpose Reverse Mortgages

Local and state government agencies offer single-purpose reverse mortgages. These mortgages are designed for a specific purpose, such as home improvement or property taxes, and you must qualify based on income and credit criteria set by the lender. These reverse mortgages typically have lower interest rates than traditional loans, but they may require you to pay origination fees and closing costs.

A single-purpose reverse mortgage differs from home equity conversion mortgages in that there are no monthly mortgage payments, and no repayment is due until you vacate the property, sell it, or pass away.

Proprietary Reverse Mortgages

Proprietary reverse mortgages, also known as private loans, are backed by the companies that develop them. Homeowners who want more money and have higher-valued properties are the best candidates for these loans. You might be eligible for a proprietary reverse mortgage if the value of your property is greater than $970,800—the lending limit for federally backed HECMs in 2022—and you meet the requirements.

Requirements for borrowing a reverse mortgage 

To apply for a reverse mortgage, you must meet the following requirements: 

Age

You must be 62 or older to be eligible for a reverse mortgage. Most privately held reverse mortgages and government-sponsored equity conversion mortgages take the borrower's age into account before making a loan. Other lenders, however, will provide options for borrowers as young as 55. Additionally, the more your age is, the more you can enjoy higher loan limits. For example, an 82-year-old can borrow more than a 62-year-old.

Primary homeowner

Your home must be your primary residence to qualify for a reverse mortgage. You must have paid off your mortgage or have a low mortgage balance that can be discharged by the reverse mortgage’s loan proceeds at closing. Additionally, you must have at least 50% equity in your home.

Income and credit score

A reverse mortgage has no minimum credit score or income requirements. Still, you need to meet financial eligibility requirements to support and fulfill your loan obligations, which include paying property taxes and insurance premiums and maintaining a regular home maintenance and repairs schedule. Additionally, you need to prove that you're willing to repay your loan.

Counseling

You must undergo counseling with a HUD counselor, who decides whether you qualify for a loan. Additionally, the counselor will give you more information about reverse mortgages and other alternatives that best suit your needs.

When is the reverse mortgage loan repaid?

A reverse mortgage loan is paid in full when the homeowner moves or dies, and the property is sold. It can also be paid off when the title is transferred to another person or the homeowner defaults on loan terms. 

If the borrower dies, the loan is repaid by selling the property. If the deceased’s estate sells the property to repay the loan, they will only receive any remaining equity after the loan is paid off. If the borrower sells the property, the loan is repaid with the sale proceeds.

How much does a reverse mortgage cost?

There are several costs associated with a reverse mortgage, and you should set aside funds to pay any closing costs. However, most HECM mortgages allow borrowers to roll the associated costs into the loan, but doing so will reduce the amount of funds you will receive.

Here are the common fees associated with reverse mortgages:

Origination fee

Lenders charge an origination fee to process the reverse mortgage application. The origination fee is usually 2% of the first 200,000 in home value, and an extra 1% of the amount above $200,000. The maximum origination fee you can pay is $6,000.

Mortgage insurance premiums

Reverse mortgages charge a 2% mortgage insurance premium (MIP) at closing and an annual MIP of 0.5% on the outstanding loan balance.

Interest fees

Lenders may charge a fixed-interest rate or adjustable interest rate depending on how you take distributions. For a lump-sum reverse mortgage, where you receive loan proceeds at once, you will pay a fixed interest rate. However, if you take distributions spread over the years, you will pay an adjustable interest rate to keep up with changing interest rates.

Third-party fees

You will incur extra costs for third-party services such as home appraisal, home inspection, credit check, and title search.