Are you a good candidate for a reverse mortgage? If you are, is there a good chance that you’ll qualify? We’ll cover the basic reverse mortgage requirements so you can determine if a reverse mortgage is a workable option 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. Before we dig into the basic reverse mortgage requirements, we’ll first set the record straight about what a reverse mortgage is and how it works. Then, we’ll cover the basic reverse mortgage requirements you’ll likely encounter.
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Reverse Mortgage Basics
The most popular reverse mortgage in the United States is the home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders).
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).
A HECM reverse mortgage enables you to convert a portion of your home’s value into cash.
No mortgage payments are required as long as at least one borrower or non-borrowing spouse lives in the home, maintains it, and pays the property taxes, homeowner’s insurance, and HOA dues (if applicable).
You remain the owner of your home and you’re free to leave it to your heirs. Your heirs will inherit any equity remaining in the home, whether they choose to sell it or keep it.
The HECM reverse mortgage is a non-recourse loan, which means that FHA will cover any shortage if your home isn’t worth enough to pay off the entire balance.
The HECM is highly versatile because it offers a variety of payout options. HECM proceeds can be received as a lump sum, line of credit, monthly income, or some combination of these options.
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
You can use the funds for whatever you like. You can also restructure your HECM in the future as your financial needs change.
Basic Reverse Mortgage Requirements
So, what are the basic requirements for a reverse mortgage? Reverse mortgage rules and requirements tend to be more lenient than other home loan products, but there are still some minimum standards you’ll need to meet.
The most important reverse mortgage requirements are as follows:
- Age – The minimum reverse mortgage age requirements depend on whether you’re married or not. If you’re not married, the minimum age is 62. If you’re married, there is no age minimum as long as at least one of you is at least 62. The younger spouse can qualify as a non-borrowing spouse.
- Property Type – Only single-family homes, FHA-approved condos, 1-4 unit multiplexes, and doublewide manufactured homes built after June 15, 1976 are eligible. Additional qualifying criteria may apply. Your home doesn’t need to be perfect, but it should be in at least reasonably good condition with no major repairs needed.
- Occupancy – At least one borrower or non-borrowing spouse must live in the home for the majority of the year. It’s OK to take long trips or live elsewhere for the part of the year, just make sure you live in the home for six months and a day out of the year.
- Income – The income requirements for reverse mortgages are extremely lenient. Yes, you need to show some income, but you don’t need show much income. In my experience, relatively few applicants are disqualified based on income. We’ll cover more details about income qualifying in a moment.
- Payment History – Your lender will evaluate payment histories for property taxes, homeowner’s insurance, HOA dues (if applicable), and any loans, mortgages, and credit cards reporting on your credit report. Your lender will want to see a perfect payment history for property taxes, homeowner’s insurance, and HOA dues for the last two years. Late payments on mortgages, loans, and credit cards are generally less critical as long as you don’t have too many of them and they payments weren’t more than a month or two late (depending on account one month late. If you fail the financial willingness test, you may still qualify by document certain extenuating circumstances.
- Counseling – 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.
The reverse mortgage qualifications and requirements are generally less strict than for other home loan products. Even if your income is low, expenses high, and your credit less than perfect, you may still be able to qualify.
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.
Income Requirements For a Reverse Mortgage
There are some minimum reverse mortgage requirements for income, but they’re generally pretty lenient. You don’t need a lot of income to qualify. I’ve worked with applicants who were able to qualify for a reverse mortgage on just Social Security checks of $800 to $1,000 per month.
Reverse mortgage lenders don’t even look at your debt-to-income ratio. They’re mostly concerned with your residual income, which is calculated by subtracting the following from your monthly gross income:
- Mortgage payments
- Loan payments
- Credit card minimum payments
- Monthly HOA dues
- Monthly property tax payments
- Monthly homeowner’s insurance payments
- An estimate of your monthly utilities based on the region you live in and the square footage of your home
If your residual income is a little short, you may still qualify by documenting certain compensating factors. In my experience, relatively few applicants are disqualified based on income.
What are the requirements of a reverse mortgage?
To qualify, you must meet certain standards with regard to age, property type, occupancy, credit, and income. You must also attend a counseling session with a HUD-licensed counselor.
Are there income requirements for a reverse mortgage?
Yes, there are some basic reverse mortgage requirements for income, but you don’t need a lot of income to qualify.