How Much Equity Do You Need for a Reverse Mortgage?

How much equity do you need for a reverse mortgage? The answer depends on a few different factors. We’ll cover what those factors are and how they determine proceeds and reverse mortgage equity requirements.

Before we explain the current reverse mortgage equity requirements, let’s first cover a few basics about how reverse mortgages work. There is lot of misinformation out there about reverse mortgages, so it’s important to set the record straight first.

Reverse Mortgage Basics

A reverse mortgage is a unique home loan designed to give you access to a portion of your home’s value without a mortgage payment and without giving up ownership of your home.

The most popular reverse mortgage in America is the home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). 

Congress created the HECM as part of the Housing and Community Development Act of 1987, which was signed into law by President Reagan. 

HECMs are funded by private lenders, but insured and regulated by the Federal Housing Administration (FHA).

The minimum qualifying age for a HECM is 62. If you’re married, only one of you needs to be at least 62. The younger spouse can qualify as a non-borrowing spouse.

No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the required property charges.

You always remain the owner of your home and you’re free to leave it to your heirs. Your heirs will inherit any equity left in the home.

The HECM is a non-recourse loan; FHA will cover the shortage if your home isn’t worth enough to cover the entire balance at the time of repayment.

Reverse mortgage borrowers commonly use the proceeds eliminate existing mortgage or other debt payments, finance home improvements, or supplement existing retirement income or assets.

Proceeds can be received in the form of a lump sum, line of credit, term/tenure payments, or some combination of all of these options.

Reverse Mortgage Equity Requirements Vary

So, what are the minimum reverse mortgage equity requirements? How much equity do you need for a reverse mortgage to be workable?

How much equity you need depends on how much you can get from a reverse mortgage. And how much you get depends on a few difference factors, including the age of the youngest borrower (or non-borrowing spouse), the value of your home, and current interest rates.

There’s no set amount that every applicant in all market conditions receives.

Here’s how age, interest rates, and home value impact reverse mortgage proceeds (and by extension, reverse mortgage equity requirements):

• Age: Older borrowers tend to qualify for more than younger borrowers. This means that older borrowers tend to need less equity than younger borrowers for a reverse mortgage to make sense.
• Interest rates: Proceeds tend to increase as interest rates decrease. When interest rates increase, proceeds tend to decrease. Interest rates and proceeds have an inverse relationship. When interest rates are higher, you’ll need more equity for a reverse mortgage to work. When interest rates are lower, you’ll need less equity.
• Home value: The FHA lending limit essentially caps the appraised value of your home for purposes of calculating reverse mortgage proceeds. If your home is worth substantially more than the current lending limit, you’ll need to have a larger equity position for the reverse mortgage to work.

How Proceeds Are Calculated

To calculate proceeds, your lender will first establish the maximum claim amount, which is equal to the lesser of the appraised value or the FHA lending limit.

Next, the lender determines the correct principal limit factor (PL factor) based on the age of the youngest borrower (or non-borrowing spouse) and the current expected interest rate.

The lender then multiplies the principal limit factor by the maximum claim amount to determine the principal limit (PL), which is the total proceeds available.

To see how the principal limit, maximum claim amount, and principal limit factor influence proceeds, let’s look at an example.

Let’s assume we have a home worth $300,000 and the principal limit factor is 0.50. The home value is less than the lending limit, so the lending limit has no impact on the calculation.

The principal limit calculation works as follows:

$300,000 (maximum claim amount) * 0.50 (principal limit factor) = $150,000 (principal limit)

As you can see, the principal limit works out to be $150,000, which is 50% of the home value. Basically, the principal limit equals 50% loan-to-value (LTV), which means the reverse mortgage equity requirements for this homeowner would be around 50%.

To see how the lending limit applies, let’s assume our appraised value is $1,000,000 and the principal limit factor is again 0.50.

Because the home value is higher than the lending limit, the maximum claim amount equals the lending limit, which we’ll assume to be $765,600 for our purposes here (the lending limit is periodically changed by FHA).

The calculation works as follows:

$765,600 (maximum claim amount) * 0.50 (principal limit factor) = $382,800 (principal limit)

Because the home value is higher than the lending limit, the principal limit equals 50% of the lending limit, not the home value. The lending limit effectively caps the home value for purposes of calculating proceeds.

Even though the principal limit factor is the same as our first example, the loan-to-value is less because of the lending limit. A principal limit of $382,800 equals 38.28% of a $1,000,000 home value. The minimum reverse mortgage equity requirements for this homeowner would be around 62% to 63%.

How Much Equity Do You Need For A Reverse Mortgage?

As we’ve covered, there’s no set amount that that every applicant receives from a reverse mortgage. Proceeds vary depending on age, interest rates, and home value. Therefore, reverse mortgage equity requirements also vary depending on age, interest rates, and home value.

As a general rule of thumb, you probably need to have at least a 40% equity position in your home if you’re in your late 70s or older.

If you’re age is late 60s to late 70s, you’ll probably need a 50% to 60% equity position in your home.

If you’re married and your spouse is younger than 62, you may need a 60% to 70% equity position, depending on how young your spouse is.

Again, these figures are not set in stone. They depend on constantly changing market conditions.

Check Out Our Reverse Mortgage Calculator

The best way to determine the current reverse mortgage equity requirements for you is to use our free HECM calculator. No personal information is required.