Key takeaways

  • Reverse mortgages allow seniors to tap into their home equity to supplement living expenses during retirement.
  • Reverse mortgages come with age, residency, equity and debt guidelines the borrower must meet to get approved.
  • If you don’t qualify for a reverse mortgage, a home equity loan, cash-out refinance or HELOC could be a viable alternative.

Reverse mortgages are a way for older Americans to access the equity in their homes and use it to fund retirement while still allowing them to live in the home. Such a mortgage pays the homeowner each month out of the home’s equity rather than the homeowner paying money to the lender.

However, reverse mortgages can be complex, and there are strict rules and guidelines dictating who qualifies for these mortgages. These rules also dictate how much income a reverse mortgage can provide and how much they cost.

It’s important to understand reverse mortgage requirements and rules if you’re considering this financial option.

Reverse mortgage requirements

There are a variety of requirements and eligibility guidelines to meet to qualify for a reverse mortgage.

Reverse mortgage age limit

First and foremost, the homeowner must be 62 or older. This is true for government-sponsored home equity conversion mortgages (HECM) and most private reverse mortgages. However, a small number of lenders may offer options for people as young as 55.

Other reverse mortgage qualifications

Beyond the age requirements, for reverse mortgages, you must meet the following additional requirements.

The home you’re seeking a reverse mortgage on must be your primary residence. That means it must be the address where you spend most of the calendar year.

  • Residency: You must either own the home outright or have a very low balance on the home when applying for a HECM reverse mortgage.
  • Debt: You cannot be delinquent on any federal debt. This would include income taxes or federal student loans. However, it’s important to note that you may use funds from a reverse mortgage to pay off such debts.
  • Reserves: You must be willing to set aside some of the reverse mortgage funds at closing (or have enough of your own money) to pay for items such as property taxes and insurance, as well as home maintenance and repair costs.

Other reverse mortgage requirements are that your house must be in good shape, and you must participate in counseling that’s provided by a HUD-approved reverse mortgage counseling agency. During the counseling session, an agent will review your eligibility for a reverse mortgage and also discuss the financial ramifications.

For instance, those who take out a reverse mortgage loan when they’re too young risk running out of money later in life, during a time when it’s likely income will be lower and healthcare bills may be steeper.

Alternatives to reverse mortgages for those that don’t qualify

If you’re looking to turn your home equity into funds but can’t qualify for a reverse mortgage due to age or other restrictions, consider some of the following options:

  • Home equity loanIf you need a lump sum of cash for a specific expense, you can access your home equity by getting a home equity loan. These loans aren’t very flexible, but they can be a low-cost way to borrow, even for younger homeowners who have sufficient equity.
  • Cash-out refinanceCash-out refinancing, like a home equity loan, lets you turn your home equity into cash you can use for other purposes. However, instead of multiple loan payments, you refinance your entire mortgage and have just one payment. This can also help you reduce your interest rate and adjust the loan’s term.
  • Home equity line of creditThe most flexible option is a home equity line of credit (HELOC). With a HELOC, you can draw funds from your equity only when you need to, which could be appealing to people who were seeking out a reverse mortgage for more income flexibility.

Reverse mortgage requirement FAQs

  • How much does a reverse mortgage cost?A reverse mortgage is not free money — interest and fees will be added to your mortgage balance each month.  That means the amount you owe on your mortgage will go up when signing on for this type of loan.

    In addition, the borrower is still required to pay property taxes and homeowners insurance.

    “The major benefit of a reverse mortgage is the cash flow benefit of eliminating the monthly mortgage payment, as well as accessing equity in the form of a line of credit or lump sum payment,” says David Reyes, financial advisor with Reyes Financial Architecture. Many financial experts suggest treating reverse mortgages as a last resort, since it often doesn’t make financial sense to sacrifice home equity for income.
  • How is the money in a reverse mortgage paid out?The loan amount available through a reverse mortgage depends on the age of the borrower (or the age of the youngest spouse when there’s a couple), as well as the home’s appraised value, current interest rates, and in the case of the HECM program, the FHA lending limit of $1,089,300 in 2023. Ways to receive payments from a HECM reverse mortgage include:
    • Line of credit: To access money this way, you’ll likely need to submit a written request to your loan servicer.
    • Term payments: You’ll receive fixed monthly payments for a specified length of time, such as five years. During this time, the amount of cash the borrower receives each month won’t change.
    • Tenure payments: With this option, you’ll receive fixed monthly payments for as long as you live in the home as your primary residence. The payments will continue even if the loan surpasses the value of the home.
    • Modified term/line of credit: This is a type of hybrid payout in which you’ll get a line of credit and fixed monthly payments for a set time.
    • Modified tenure/line of credit: Similar to the above hybrid option, you’ll get a line of credit and fixed monthly payments as long as the home is your primary residence.
    • Lump sum: You can request to receive all the available funds in one payment.
  • When are you required to pay back the reverse mortgage?The borrower is not required to pay back a reverse mortgage loan until the home is sold, vacated or the last surviving borrower dies. However, if the home at some point is no longer your primary residence, you will be required to pay back the loan.

    In addition, you may also need to pay back the loan sooner if you fail to pay the property taxes or homeowners insurance, or if you don’t keep the home in good condition.

Mia Taylor

Fri, September 1, 2023