March 30, 2019 by HECM Pro
How much equity do you have to have to qualify for a reverse mortgage? Great question! The answer is: it depends! There’s no set amount that everybody qualifies for, so there’s no set amount of equity you need to make a reverse mortgage workable.
How much you qualify for depends on several factors, including your home’s value, age of the youngest borrower, current interest rates, the program you select (variable-rate HECM or fixed-rate HECM), how the program is set up (lump sum, line of credit, term or tenure payments, or some combination of all of these), income and credit, and how well you’ve kept up with required property charges.
Having said that, there are some general rules of thumb I can go over in a minute. But before we get into that, let’s first cover a few reverse mortgage basics. If you’re very familiar with the reverse mortgage already, feel free to skip past the next section. Otherwise, let’s cover some basics so I can adequately answer the equity question.
First, A Few Basics
The most common reverse mortgage in America today is the FHA-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). The HECM is a mortgage program that enables seniors 62 or older to convert a portion of their home’s value into cash without giving up ownership of the home or taking on a mortgage payment.
As long as at least one borrower is living in the home and paying the required property charges, no mortgage payments are required. The reverse mortgage only has to be repaid when the last borrower permanently leaves the home.
You always retain title ownership of the home and you’re free to leave it to your heirs, who will inherit any equity remaining in the home.
The HECM is a non-recourse loan, which means the most that will ever have to be repaid is the value of your home. If the home isn’t worth enough to pay off the entire loan balance, FHA will cover the shortage.
The HECM is very versatile and can be tailored to your financial goals and needs. Proceeds can be received in the form of a line of credit, lump sum, monthly term or tenure income, or some combination of all of these options.
How Much Equity Do You Have to Have to Qualify for a Reverse Mortgage?
Now, back to our question: how much equity to you have to have to qualify for a reverse mortgage? Theoretically, you don’t need any equity in your home to qualify for a reverse mortgage. However, if you don’t qualify for enough to pay off your entire existing mortgage balance, you’ll need to bring the difference between what you owe and what you qualify for to the closing table to make the deal work.
For example, if you owe $150,000 on your home, but you only qualify for a reverse mortgage of $130,000, you’ll need to bring the $20,000 difference to the closing table. In other words, you’ll need to pay down your existing loan balance by $20,000 to close the reverse mortgage.
If you have the available cash, this can make a lot of sense. A few years ago, I had a client bring in $120,000 to get a reverse mortgage and eliminate a $3,000 mortgage payment. The reverse mortgage didn’t offer enough to pay off his entire existing mortgage balance, so he brought the difference to the closing table.
When you think about it in ROI terms, it made perfect sense. He paid $120,000 to eliminate a $36,000 annual expense for possibly the rest of his life (he had 25+ years left on his mortgage). That’s a 30% cash-on-cash return just the first year!
How much you qualify for depends on a few different factors, including age of the youngest borrower (or non-borrowing spouse), the current expected interest rate, what program you select (variable-rate HECM or fixed-rate HECM) and how the program is structured.
Older borrowers tend to qualify for more than younger borrowers, which means older borrowers don’t need as much equity as younger borrowers for the program to work.
The HECM tends to offer more money when rates are low, which means you need less equity than if rates are higher. Rates are still at record lows as of this writing, so it’s as good a time as any to get a HECM done.
Most HECM borrowers who have good credit and income qualify for around 45% to 55% of their home’s value, which means they need a 45% to 55% equity position to make the loan work without bringing cash to closing.
If you’re older (80s or 90s), you may need only a 40% equity position.
For a better estimate, feel free to use our free HECM reverse mortgage calculator.
For an even more exact estimate, I’d recommend checking with a few reputable lenders.