Are you a good candidate for a reverse mortgage? Find out here! We’ll cover the basic reverse mortgage requirements to help you determine if a reverse mortgage is right for you.
Congratulations on looking into a reverse mortgage! We’ll be the first to acknowledge that a reverse mortgage isn’t perfect for everybody. However, for the right candidate, it can be a fantastic financial solution. There is a lot of misinformation floating around about reverse mortgages, so we’re glad you’re here. We’ll set the record straight about how a reverse mortgage works and what is required to get one.
Feel free to use the following table of contents to jump to the content you’re most interested in. We’ve included “Back to Top” links throughout the article to make it easier to return to the top of the page. We hope you find this information helpful! If you have any questions, please post them in our Q&A.
Table of Contents
What is a Reverse Mortgage?
Before we dig into reverse mortgage requirements, let’s first cover what a reverse mortgage is and how it works. Again, there is a lot of misinformation out there, so we want to set the record straight first.
First of all, a reverse mortgage is simply a home loan. It’s a unique home loan designed to give you access to your home equity without a mortgage payment or giving up ownership of the home.
The most popular reverse mortgage in the United States is the home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If somebody you know recently got a reverse mortgage, it’s likely they got a HECM.
The HECM program was created and signed into law by President Ronald Reagan as part of the Housing and Community Development Act of 1987. The Federal Housing Administration (FHA) insures and regulates the HECM under the authority of the Department of Housing and Urban Development (HUD).
Over 50,000 seniors get HECMs every year in America today. That number will likely grow in the future as more seniors learn about the program.
How Does a Reverse Mortgage Work?
Again, the HECM is simply a home loan designed to give you access to your home equity without a mortgage payment and without giving up ownership of your home. 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 can keep the home by paying off or refinancing the balance. If your heirs don’t want the home, they can choose to sell it. Escrow will pay off the balance at closing and the remaining equity will go to your heirs. If your heirs don’t want the home and don’t want to deal with selling it, the lender will sell it. The lender must sell the home for market value as documented by an appraisal. Again, escrow pays off the balance and the remaining equity goes into your estate and to your heirs.
The HECM reverse mortgage is a non-recourse loan; the most that will ever have to repaid is the value of the home. If the home isn’t worth enough to settle the entire balance, FHA will cover the shortage.
The HECM is highly versatile and offers a variety of payout options. HECM proceeds can be received as a lump sum, line of credit, term/tenure income, or some combination of these options. You can also restructure your HECM in the future as your financial needs change.
Because the HECM is so versatile, it can accomplish a variety of things. HECM borrowers commonly use it to:
- Eliminate existing mortgage payments
- Eliminate other debts, such as credit cards, medical bills, and auto loans
- Finance home improvements
- Supplement retirement income
- Increase liquid retirement assets
- Set up a rainy day or emergency fund
We’ve covered just the reverse mortgage basics in this section. If you’d like to dig a little deeper, click here.
Reverse Mortgage Age Requirement
The HECM is pretty easy to qualify for, but there are some minimum requirements. You must live in and own your own home and be at least 62 or older. If you’re married, only one borrower needs to be at least 62. The younger spouse can qualify as a non-borrowing spouse.
There is no minimum equity requirement, but you need to have a significant amount of equity for a reverse mortgage to be workable. Typically you want to have at least a 50% or more equity position in your home. It can work if you have less equity, but you could end up short to close, which means you don’t qualify for enough to pay off your entire existing mortgage balance. You’ll need to be and will need to bring money to closing.
Prior to 2014, there were very few credit and income requirements to get a HECM reverse mortgage. It was possible to qualify with zero income and terrible credit. Unfortunately, this contributed to a growing default problem (due to nonpayment of property charges) that resulted in losses for FHA. To solve the problem, HUD implemented new lending guidelines called financial assessment. Today, you must meet certain income and credit requirements to qualify for a HECM.
Though HECM lending guidelines are tighter than they used to be, they’re still generally less stringent than traditional “forward” mortgage guidelines. You don’t need perfect credit and you don’t need a lot of income to qualify for a HECM. Your income and credit are likely fine as long as you pass two financial assessment “tests” called financial ability and financial willingness. The financial ability assessment is based on income and the financial willingness assessment is based on credit. We’ll cover both in more detail next.
Reverse Mortgage Income Requirements
To qualify for a HECM reverse mortgage, you must pass an income assessment called financial ability. The financial ability assessment determines if you have enough income to pay your monthly expenses and property charges. Remember, paying property charges is a key requirement of the HECM program.
The financial ability determination is based primarily on your residual income. Lenders calculate your residual income by tallying your monthly obligations and subtracting them from your monthly income. You’ll pass the assessment if your residual income is higher than the required minimum.
If your residual income is less than the required minimum, you may still be able to qualify if you can document certain compensating factors.
If your residual income is less than the requirements and you can’t document any compensating factors, the lender may still approve your reverse mortgage with a LESA.
Reverse Mortgage Credit Requirements
To qualify for a HECM, you pass a credit assessment called financial willingness. The financial willingness assessment determines if you have a reasonably good history of paying your monthly obligations. The idea is that those who don’t have a good history of paying their bills are more likely not pay their property charges and potentially default.
The financial willingness assessment is based on mainly on credit. Do you have a history of paying your bills at least reasonably well? Are there any serious derogatory credit items on your credit report, such as bankruptcies, foreclosures, charge offs, or collections?
Lenders also assess how well you pay property taxes, homeowner’s insurance, and HOA dues, which are not reported on a credit report.
Note that you do not need to have perfect credit to qualify for a HECM. If you fail financial willingness, you may still qualify by documenting an extenuating circumstance.
If your income and/or credit don’t meet the guidelines and you can’t document compensating factors or extenuating circumstances, you may still qualify. The lender may still approve your file with a life expectancy set aside (LESA).
If you have any concerns about your credit, you may wish to pull a credit report on yourself before applying for a reverse mortgage. Per federal law, you can obtain a free credit report once per year at annualcreditreport.com.
HUD requires that you complete a reverse mortgage counseling session when you apply for a HECM reverse mortgage. The purpose of counseling is to ensure that you understand how a reverse mortgage works. You don’t need to be an expert, but you do need to at least have the basics down. Counselors have the authority to “fail” you if they believe you don’t have at least a decent understanding of the HECM program.
An independent HUD-licensed counselor conducts the counseling session and the cost is usually around $125. Your counselor will issue a certificate once the counseling is complete.
You can easily find reverse mortgage counselors in your area or across the nation using our reverse mortgage counselors directory. Your lender may also be able to provide a list of counselors.
If you’d like to see how much you may be able to get from a reverse mortgage, check out our reverse mortgage calculator. We may be a little biased, but we think our calculator is the best on the web. No contact information is required!
If you’re interested in a HECM for purchase, check out our reverse mortgage for purchase calculator.
If you’d like to calculate a simple principal limit, then check out our principal limit calculator.