What is a reverse mortgage, and how does it work?
If you’re 62 years or older, you might be eligible for a reverse mortgage. These types of mortgages aren’t for everyone, since they take equity out of your home and must be paid back when you sell the home or die. For example, a reverse mortgage probably isn’t a good idea if you’re planning to pass your home onto your heirs. But for some borrowers, having the ability to take money out of their house and use it to supplement their income can make a reverse mortgage a very useful tool. What is a reverse mortgage? A reverse mortgage is a type of home loan only available to people aged 62 or older. It’s for people who have gained a lot of equity in their home since originally buying it and may even have fully paid off their mortgage already. A forward mortgage — which you probably think of as a regular mortgage — is a type of loan you’d use to buy a home. You make monthly payments to the lender until the home is paid off, A reverse mortgage, on the other hand, is used after you’ve already bought the home. The lender pays you, and the money comes out of the equity you’ve acquired in the house. Over time, your debt increases. A reverse mortgage is not the same thing as a home equity loan or a home equity line of credit. All three are tools for tapping into your home equity, but they operate differently. How does a reverse mortgage work? How much you’ll be able to borrow depends on your age, the current interest rate of the loan, and how much your home is worth. The money you get from a reverse mortgage is tax-free. The IRS sees it as a loan, not as taxable income. When the home is eventually sold (whether you’re living or dead), the proceeds go to the lender to pay off your debt from the reverse mortgage. Any additional money from the sale will go to you if you’re living, or to your estate if you’re dead. If your heirs want to keep the property, then they can pay off the reverse mortgage themselves. The 3 types of reverse mortgages Home equity conversion mortgage (HECM) This is the most common type of reverse mortgage. HECMs are a type of government-backed loan, meaning you’ll get it through a private lender and a federal agency (in this case, HUD) will insure it. Since they’re the most common type of reverse mortgage, most of the specific guidelines we mention in this article are referring to HECMs. Other types of reverse mortgages have requirements that are set by individual lenders, not the government, so they can vary a lot. Proprietary reverse mortgage With a proprietary reverse mortgage (also known as a jumbo reverse mortgage), you borrow an amount that exceeds the HUD limit. This could be the case if your home is worth a lot of money and you’ve either paid off the original mortgage or have a low amount left to pay. Proprietary reverse mortgages aren’t backed by the government. You’ll get one through a private lender. These reverse mortgages sometimes have lower age limits than HECMs; borrowers as young as 55 may qualify, depending on the lender. But they’re often more expensive. Single-purpose reverse mortgage A single-purpose reverse mortgage only allows your funds to be used for one thing. For example, the lender may tell you the money can only go toward home repairs or property taxes. These types of reverse mortgages are offered by some nonprofit organizations, or by local or state government agencies. They’re typically very affordable and enable older homeowners to keep up with their homes, make necessary home repairs, or afford their property taxes. But these loans can be hard to find. Who qualifies for a reverse mortgage? Reverse mortgage requirements Age requirements You must be 62 or older to get a HECM reverse mortgage. If you live in the home with your spouse, then ideally, you’d both be at least 62 years old. But you do have options if one spouse is younger. If you’re the older spouse, then you can be the sole borrower of the reverse mortgage. Your spouse will be referred to as the “non-borrowing spouse.” In this case, though, your younger spouse could lose the home if you die first, or have to pay off the mortgage when you die to avoid selling the home to pay off the lender. Depending on the situation, your spouse might be able to keep living in the home after you die, but they would no longer receive the mortgage payments. Talk to your lender or a Department of Housing and Urban Development counselor about your options if your spouse is under age 62. Credit requirements HUD says that when you apply for a reverse mortgage, the lender will look at your income, assets, expenses, and credit. But there’s no minimum credit score requirement for these loans. They will make sure that you’ve been paying your taxes and insurance on time, though, and that you can continue to do so. You can’t have a mortgage with a large balance on the property. You’ll generally need to have at least 50% equity in the home, meaning you can’t have a mortgage for more than half of what the house is worth. Property type Properties that are eligible for a reverse mortgage backed by HUD include: Occupancy requirement Reverse mortgages are only available on primary residences. You can’t get a reverse mortgage on a second home or investment property. Mandatory counseling Prospective reverse mortgage borrowers must meet with a HUD-approved counselor. Reverse mortgage loan limits The maximum loan amount for reverse mortgages allowed by HUD is $1,149,825 in 2024. But you may not be able to borrow this much. The amount you’ll be approved for depends on the age of the youngest borrower (or non-borrowing spouse), your current rate, and what your house is worth. Ultimately, the amount you’ll be approved for will only be a portion of your home’s total