Picture this: You’re a homeowner of a certain age, most of your net worth lies in the value of that home and you’re feeling strapped for cash. Maybe you don’t have enough income to meet your expenses. Or maybe you just need some extra money to make your retirement more enjoyable. Should you consider that tempting offer to “convert your home to cash!” (as the omnipresent ads say) with a reverse mortgage?

A reverse mortgage is a type of loan, and, as with any financing, banks expect borrowers to meet certain qualifications. This article will give you an idea of whether it’s worth your time to apply for one. As most reverse mortgages are issued as home equity conversion mortgages (HECMs), we’ll focus on those. Proprietary reverse mortgages and single-purpose reverse mortgages may have different requirements. (For more, see What Are the Different Types of Reverse Mortgages?)

Your Age

A homeowner must be at least 62 years old to qualify for a reverse mortgage. Why? Because the federal government says so. Your age also determines how much you can borrow. Generally, the younger you are, the less you’ll get; the older you are, the more you’ll get. Even if they qualify, some applicants may be too young for a reverse mortgage to be a decent source of funds.

Your Ownership Status

The next requirement is that you either own your home free and clear or have a small remaining mortgage balance – “small balance” being defined as one that can be paid off with the reverse-mortgage proceeds. You also have to hold title to the home and live in it as your principal residence. 

You can’t get a reverse mortgage on a rental home or vacation home. Also, if haven’t lived in your primary residence for a year (for example, health issues have caused you to move to a senior care facility), it isn’t eligible for a reverse mortgage. The home usually has to be a single-unit dwelling, with the exception of a two-to-four–unit property in which you live in one unit and rent out the others. If your home is a condominium, you can get a reverse mortgage on it if it’s on the U.S. Department of Housing and Urban Development (HUD)’s approved condominium complex list (click here to check).

Your home also must be in good repair. If it isn’t, you may still be able to get a reverse mortgage conditional upon using some of the proceeds to make required repairs. HECMs are insured by the Federal Housing Administration, and it has minimum property standards for the loans it guarantees.

Your Finances

You don't need income to qualify for a reverse mortgage, because you will be getting payments instead of making them. While the mortgage will have origination fees and closing costs, you can roll these into the loan if you don’t want (or can’t afford) to pay for them up front and out of pocket.

That being said, you’re not entirely off the hook when it comes to financial qualifications. One of the conditions of getting a reverse mortgage is that you must continue to maintain your home and pay homeowner’s-insurance premiums and property taxes. If you don’t do these things, the lender’s collateral – that is, your house – is at risk. The lender will perform a financial assessment when underwriting your reverse mortgage, and if you don’t have enough income or liquid assets, the lender might set aside part of your reverse-mortgage proceeds to cover taxes and insurance. 

Because HECMs are federally insured, you can’t get one if you owe the government money. If you are long overdue on paying your income taxes, a Small Business Administration loan or federal student loans, you’ll need to get current before you can qualify for a reverse mortgage. Lenders will be able to tell if you’re delinquent from your credit report.

Mortgage Counseling

The federal government mandates that anyone who wants to get a reverse mortgage must first go through mortgage counseling, and it approves the independent agencies that provide it. Counselors will thoroughly advise you on the costs and consequences involved in a HECM, as well as your options on how to take the proceeds.

The going rate for mortgage counseling, according to the Federal Trade Commission, is about $125. Those who can’t afford it must search for a reverse-mortgage counselor willing to forego the fee. Again, there are no exceptions. You must take the counseling, even if you believe you understand the subject thoroughly. This is to protect people from making bad financial decisions that come back to haunt them. Not everyone has financial savvy. For those who are very sure of themselves, at least counseling by phone is available in most states, generally a less expensive option with greater convenience. Find the Right Reverse Mortgage Counseling Agency has details.

When a Spouse Is Under 62

When taking out a reverse mortgage, you and your spouse must both be on the contract, even if one of you is under 62. The younger spouse will not be a borrower, but his or her age will be taken into consideration in determining the loan proceeds. However, there is a deferral period that prevents a widow or widower from potentially losing the home.

Also, what HUD calls a “non-borrowing spouse” may not receive any proceeds from the reverse mortgage after his or her spouse’s death – a problem if the proceeds were not obtained as a lump sum but rather as monthly payments or a home equity line of credit. This payments issue should be thought through carefully whenever a non-borrowing spouse is about to be involved in a reverse mortgage. (For a fuller explanation, read Could Your Widow(er) Lose the House?)

The Bottom Line

It’s generally easier to qualify for a reverse mortgage than to qualify for a regular, forward mortgage. Your credit score isn’t a factor, and you only need enough income or assets to continue paying for homeowner’s insurance, property taxes and home maintenance. You must be at least 62 and include your spouse on the loan, which you’d want to do anyway, so he or she isn’t foreclosed on when you die.

If you think a reverse mortgage might be right for you, the next step is to find a lender. (For more, see Find the Top Reverse Mortgage Companies.) If you don’t meet the basic qualifications, fear not. Other options exist, such as a home-equity loan or home equity line of credit.

Continue Reading