Reverse mortgage requirements

A reverse mortgage can be a great way for older homeowners to get extra cash from the equity they’ve built up, but it’s not exactly free money. A reverse mortgage is still an interest-charging loan and places a lien on your home. That doesn’t mean it’s a bad idea, though. If you’re considering this route, here’s what you need to know about reverse mortgage requirements.

What is a reverse mortgage?

Reverse mortgages are a type of loan that allows homeowners aged 62 and older to borrow against the equity in their home (the portion they own outright). Instead of the homeowner making payments to their lender each month, the lender pays the homeowner a sum (the reason it’s a “reverse” mortgage). You can use these tax-free payments to help fund retirement, supplement your income or pay off expenses while still living in your home.

“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, founder and chief financial architect at Reyes Financial Architecture, a San Diego, California, financial planning firm.

The funds do have to be repaid when you die, when you permanently move out of the home or when you sell it.

Reverse mortgage requirements

You must meet a variety of requirements to qualify for a reverse mortgage, including those surrounding your age and finances.

Age requirements for a reverse mortgage

The age requirement for a reverse mortgage is an important qualifying factor. In order to be eligible, you must be 62 or older. That’s the minimum age set for government-sponsored home equity conversion mortgages (HECMs) and most private reverse mortgages. However, some lenders do have a lower age requirement for reverse mortgages, with options for people as young as 55.

Counseling requirements for a reverse mortgage

Another requirement involves participating in counseling that’s provided by a HUD-approved reverse mortgage counseling agency. During the counseling session, an agent reviews your eligibility for a reverse mortgage and discusses the financial consequences. Those who take out a reverse mortgage when they’re too young risk running out of money later in life, when it’s likely that income is lower and healthcare bills are higher.

Financial requirements for a reverse mortgage

On the financial front, reverse mortgages require that you aren’t delinquent on any federal debt, such as income taxes or federal student loans. You must also 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 homeowners insurance.

Property requirements for a reverse mortgage

There are also property requirements associated with reverse mortgages, including:

• The home must be your primary residence: That means your house must be the address where you spend most of the calendar year.
• The home must be in livable condition: If your home isn’t in acceptable condition, your lender may ask you to make improvements before approving your reverse mortgage. The funds you have in reserve should be able to meet home maintenance and repair costs.
• You must have sufficient equity built up in the home: This means that you must own a significant portion (if not all) of the home outright, and have paid off most of the mortgage.

If you do have an outstanding mortgage balance, you’ll need to settle it when you close on the loan. You will probably need to pay off other home-secured debts, like home equity loans or lines of credit (HELOCs), as well.

Alternatives to reverse mortgages for those that don’t qualify

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. And not every applicant will qualify for one. So consider some of the following alternatives:

• Home equity loan: If you need a lump sum of cash for a specific expense, you can access your home equity by getting a home equity loan. These fixed-rate loans, which are basically a second mortgage, can be a low-cost way to borrow, even for younger homeowners who have enough equity.
• Cash-out refinance: Cash-out refinancing, like a home equity loan, lets you turn your home equity into cash that 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 credit: The 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 seek out a reverse mortgage to cover ongoing expenses.

Reverse mortgage requirement FAQ

• 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. Current fixed interest rates on a HECM fixed-rate reverse mortgage range from about 7.56 percent to about 7.93 percent. This is a little steeper than traditional mortgage rates, which are currently averaging just under 7 percent.
  Because you’re charged interest on the loan, the amount you owe will go up. In addition, you’ll still need to pay property taxes and homeowners insurance.

• How is the money in a reverse mortgage paid out?

  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 each month won’t change.
  • Tenure payments: 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 home’s value.
  • Modified term/line of credit: This is a type of hybrid payout in which you’ll get both 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 a reverse mortgage?

  The borrower is not required to pay back a reverse mortgage loan until the home is sold or vacated or until they and a cohabiting spouse dies. However, if the home is no longer the borrower’s primary residence, they will need to pay back the loan. In addition, the loan may be called in if the borrower fails to pay the property taxes or homeowners insurance, or doesn’t keep the home in good condition.