Taking out a reverse mortgage can allow retirees to access their home equity without having to make payments toward a home equity loan or a home equity line of credit (HELOC). There are a number of requirements to qualify for a reverse mortgage, and income is an important consideration. Reverse mortgage companies use income and financial resources to assess a homeowner’s ability to meet certain costs, including property taxes and upkeep.
- A reverse mortgage allows homeowners to withdraw equity from their homes and use it as a supplemental stream of income.
- Reverse mortgages that are backed by the federal government are called home equity conversion mortgages (HECMs).
- In addition to age guidelines, homeowners must meet income and financial resource requirements to qualify for an HECM.
- Different types of income—including earnings from employment, disability benefits, and Social Security benefits—can be used to determine a homeowner’s ability to pay reverse mortgage-related costs.
What Is a Reverse Mortgage, and Who Can Get One?
A reverse mortgage is a special type of loan that allows eligible homeowners to turn their home equity into an income stream. In a reverse mortgage arrangement, a homeowner can draw a lump-sum payment, or regular installment payments against their equity, or have a line of credit. These payments are made by a reverse mortgage company.
During the homeowner’s lifetime, they aren’t obligated to pay anything toward the reverse mortgage balance as long as they use the home as their principal residence. Interest and fees accrue in the meantime. If the homeowner sells the property, moves out of the home, or dies, the balance is payable in full.
A reverse mortgage that’s backed by the federal government through the U.S. Department of Housing and Urban Development (HUD) is called a home equity conversion mortgage (HECM). It is available for homeowners age 62 or older who:
- Own their homes outright or have paid down most of the mortgage.
- Are not delinquent on federal debt.
- Live in the home as a principal residence.
- Attend HUD-approved consumer counseling.
Applicants for an HECM also must be able to demonstrate that they have sufficient financial resources, in the form of income and/or savings, to be able to pay certain homeownership costs, which include property taxes, homeowners insurance, homeowners association (HOA) fees (if applicable), maintenance, repairs, and upkeep.
HECM borrowers must live in an eligible property, which can include single-family homes as well as multifamily homes, as long as the borrower lives in one of the multiple units.
Reverse Mortgage Income Requirements
When a homeowner applies for an HECM, they’re subject to a cash flow/residual income analysis. According to HUD, the purpose of this analysis is to “determine the capacity of the mortgagor to meet his or her documented financial obligations with his or her documented income.”
The HECM program can use income from a borrower, a co-borrower, and an eligible non-borrowing spouse for cash flow analysis calculations. Countable income can include both taxable and nontaxable income sources, such as:
- Wages, salaries, commissions, and tips
- Self-employment income
- Rental income
- Dividends and interest
- Trust income
- Social Security benefits
- U.S. Department of Veterans Affairs (VA) benefit payments
- Federal government employee retirement benefits
- Railroad Retirement program benefits
- State government retirement income benefits
- Certain types of disability and public assistance benefits
- Child support
- Military allowances
- Other income that’s exempt from federal income tax
The cash flow analysis also includes an assessment of the homeowner’s liabilities and outgoing payments each month. Liabilities include obligations such as loan payments and credit card payments.
So how much income do you need for a reverse mortgage? The answer depends on where you live. HUD publishes a residual income table of sufficient monthly income levels by family size and region.
|Residual Incomes by Region|
|Four or more||$1,066||$1,041||$1,041||$1,160|
Source: U.S. Department of Housing and Urban Development
Reverse mortgage companies are allowed to consider extenuating circumstances for borrowers who don’t meet the minimum cash flow/residual income analysis guidelines. For example, someone who has received notice that they’re approved for Supplemental Security Income (SSI) benefits that will begin within the next 12 months may be able to use that future income to be approved for a reverse mortgage.
If you’re including rental income on your application for a reverse mortgage, you must report that income on your taxes for it to be included in your cash flow calculation.
Reverse Mortgage Alternatives
Homeowners who don’t meet the income requirements for a reverse mortgage may have other options for borrowing against their equity. For instance, they may be able to get a home equity loan or a HELOC instead.
Use an online home equity loan or HELOC calculator to estimate how much of your home equity you might be able to borrow against.
Which is better, a home equity loan or a HELOC? With a home equity loan, you can borrow a lump sum and use that money for virtually any purpose, including debt consolidation, home repairs, and medical expenses. Your home equity loan is a second mortgage, as it’s secured by the home, so if you haven’t yet paid off your home in full, you’ll have to consider whether it’s feasible to have two mortgage payments.
Home equity loans typically have fixed interest rates, while HELOCs generally have variable rates. The advantage with a HELOC is that you’re not borrowing a lump sum; instead, you’re getting a line of credit that you can draw against as needed. This means that you only pay interest on the portion of your credit line that you use. You may pay nothing or make interest-only payments during the draw period before your regular payments begin.
Is there an income requirement for a reverse mortgage?
If you’re applying for a home equity conversion mortgage (HECM), you need to be able to show sufficient income and financial resources to pay certain costs, including homeowners insurance, property taxes, homeowners association (HOA) fees, maintenance, repairs, and upkeep. The amount of income that you need to qualify can depend on where your home is located.
What is the debt-to-income ratio for reverse mortgages?
Debt-to-income ratio represents what percentage of your income goes to debt repayment each month. Reverse mortgages do not consider it for approval, though a lender will look at how much debt you have.
What are the requirements for getting an HECM?
To get an HECM, you need to be age 62 or older and own your home outright or have paid down most of the mortgage. You must have sufficient financial resources, including income and other assets, and attend U.S. Department of Housing and Urban Development (HUD)-approved consumer counseling. You also can’t be delinquent on any federal debt, such as taxes or student loans.
The Bottom Line
A reverse mortgage is not for everyone, but it might prove a good source of supplemental income in retirement, provided you can show that you have sufficient income to qualify. The main attraction is that you don’t have to repay a reverse mortgage as long as you’re living in the home. However, you will still need to keep the home in good shape, make sure it’s properly insured, and pay your property taxes.
If you’re married, it’s important to learn how the rules of reverse mortgages affect spouses. Your children and unmarried partners can also be affected. And there are residency rules that need to be considered.
If you’re interested in borrowing against your equity in this way, researching the best reverse mortgage companies can be a good place to start.
Consumer Financial Protection Bureau. “What Is a Reverse Mortgage?”
U.S. Department of Housing and Urban Development. “How the HECM Program Works.”
Federal Trade Commission, Consumer Advice. “Reverse Mortgages.”
U.S. Department of Housing and Urban Development. “HECM Financial Assessment and Property Charge Guide,” Page 29.
U.S. Department of Housing and Urban Development. “HECM Financial Assessment and Property Charge Guide,” Pages 31, 36–37, 40, 46–50, and 51.
U.S. Department of Housing and Urban Development. “HECM Financial Assessment and Property Charge Guide,” Page 58.
U.S. Department of Housing and Urban Development. “HECM Financial Assessment and Property Charge Guide,” Page 69.
U.S. Department of Housing and Urban Development. “HECM Financial Assessment and Property Charge Guide,” Page 73.
U.S. Department of Housing and Urban Development. “HECM Financial Assessment and Property Charge Guide,” Pages 46–50.
First National Bank of Omaha. “Monthly Payment Calculator for Home Equity Loan.”
Bank of America. “Home Equity Line of Credit Payment Calculator.”
Consumer Financial Protection Bureau. “What Is a Home Equity Loan?”
Consumer Financial Protection Bureau. “My Lender Offered Me a Home Equity Line of Credit (HELOC). What Is a HELOC?”