A reverse mortgage is a loan taken out against the value of your home. If you are 62 years old or older and have considerable home equity, you can borrow against the value of your home and receive funds as a lump sum, fixed monthly payment, or line of credit. Unlike a forward mortgage—the type used to buy a home—you won’t make any payments to your lender. Instead, the entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home.
A reverse mortgage is one way of accessing the equity you’ve built up in your home during retirement. Other options include a cash-out refinance or a home equity loan. Each of these financial products has different eligibility and qualification requirements. In this article, we’ll look at what you need to qualify for a reverse mortgage.
There are three types of reverse mortgages. The most common is the home equity conversion mortgage (HECM). The HECM represents almost all of the reverse mortgages that lenders offer on home values below $970,800, so that’s what this article will discuss. If your home is worth more, however, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage.
- Reverse mortgages have two primary qualification criteria—you must be at least 62 years old and you must own a significant amount of equity in your home.
- While the specific percentage of equity required varies across lenders, typically you’ll need 50%.
- There are no credit score or income requirements for reverse mortgages.
- The U.S. Department of Housing and Urban Development (HUD) requires all prospective reverse mortgage borrowers to complete a HUD-approved counseling session.
- Borrowers must also pay an origination fee and an up-front mortgage insurance premium.
- While not technically a requirement to get a reverse mortgage, you will need to pay for property taxes and homeowners insurance once you have the mortgage.
What Is Required To Get a Reverse Mortgage?
There are a number of requirements you must meet in order to qualify for a reverse mortgage. The most important of these relate to your age and the amount of equity you own in your home.
Reverse mortgages are designed to allow older homeowners without other sources of retirement savings to access the equity they’ve built up in their home. Because of this, you must be at least 62 years old in order to qualify for a reverse mortgage. And if you’d like to add your spouse as a co-borrower (which you should do if you can), they must also be 62 years old.
You must also own a significant level of equity in your home—generally at least 50%. You must live in the property you are taking out the reverse mortgage against, and it must be a house, condominium, townhouse, or a manufactured home built on or after June 15, 1976.
Under FHA rules, cooperative housing owners cannot obtain reverse mortgages since they do not technically own the real estate in which they live but rather own shares of a corporation. In New York, where co-ops are common, state law until recently prohibited reverse mortgages in co-ops, allowing them only in one- to four-family residences and condos.
In December 2021, Governor Kathy Hochul signed a bill allowing New Yorkers age 70 and older to take out reverse mortgages on their co-op apartments. The bill went into effect in March 2022, and residents of New York State can now qualify for two types of reverse mortgages for borrowers: HECMs insured by the federal government or proprietary reverse mortgages.
Income and credit checks
Reverse mortgages don’t have income or credit score requirements. This is one of the ways in which reverse mortgages differ from a home equity loan or a home equity line of credit (HELOC). HELOCs provide homeowners access to home equity. Unlike a reverse mortgage, home equity loans and HELOCs require borrowers to make payments and to qualify you must have a respectable credit score. On the other hand, they may come with fewer fees and can be a less expensive alternative to a reverse mortgage.
The U.S. Department of Housing and Urban Development (HUD) requires all prospective reverse mortgage borrowers to complete a HUD-approved counseling session. This counseling session, which usually costs around $125, should take at least 90 minutes and cover the pros and cons of taking out a reverse mortgage given your unique financial and personal circumstances.
The counselor will explain how a reverse mortgage could affect your eligibility for Medicaid and Supplemental Security Income (SSI), and should also go over the different ways that you can receive the proceeds from your reverse mortgage.
There are costs associated with setting up a reverse mortgage. Borrowers must pay an origination fee and an up-front mortgage insurance premium. These costs are often paid from the loan itself, meaning that you may not need any savings to take out a reverse mortgage. It’s important to recognize, however, that the up-front costs of reverse mortgages are high, whether you are paying them from your own pocket or from the equity you own.
While not technically a requirement to get a reverse mortgage, you will need to pay for property taxes and homeowners insurance once you have the mortgage. If you fall behind on these payments or you stop living in the house for longer than one year—even if it’s because you’re living in a long-term care facility for medical reasons—then you’ll have to repay the loan, which is usually accomplished by selling the house.
There are alternative ways to access your home equity in retirement. These include a cash-out refinance or a home equity loan. Both have more stringent qualification requirements than a reverse mortgage, but both can be more cost-effective in the long term. You should check if you qualify for these other financial products before considering a reverse mortgage.
What If You Don't Qualify
If you don’t qualify for any of these loans, what options remain for using home equity to fund your retirement? You could sell and downsize or you could sell your home to your children or grandchildren to keep it in the family, perhaps even becoming their renter if you want to continue living in the home.
What Disqualifies You From Getting a Reverse Mortgage?
You must live in your home as your primary residence for the life of the reverse mortgage and be at least 62 years old. Vacation homes or rental properties are not eligible. You must own your home outright or have at least 50% equity in your home to be eligible for a reverse mortgage loan.
What Percentage of Equity Is Needed for a Reverse Mortgage?
About 50% equity. To qualify for a reverse mortgage, borrowers must own their home outright or have significant equity. The specific percentage varies by lender and the type of reverse mortgage, but the general rule of thumb is to have at least 50% equity in your home.
What Are the Three Types of Reverse Mortgages?
There are three kinds of reverse mortgages: single-purpose reverse mortgages offered by some state and local government agencies, as well as nonprofits; proprietary reverse mortgages, which are private loans; and federally insured reverse mortgages, also known as home equity conversion mortgages (HECMs).
The Bottom Line
Reverse mortgages have two primary qualification criteria—you must be at least 62 years old, and you must own a significant amount of equity in your home. While the specific percentage of equity required varies across lenders, typically you’ll need at least 50%. There are no credit score or income requirements for reverse mortgages.
The U.S. Department of Housing and Urban Development (HUD) requires all prospective reverse mortgage borrowers to complete a HUD-approved counseling session, and borrowers must pay an origination fee and an up-front mortgage insurance premium. And while not technically a requirement to get a reverse mortgage, you will need to pay for property taxes and homeowners insurance once you have the mortgage.