A reverse mortgage allows homeowners aged 62 or older to convert a portion of their home equity into cash without taking on a new monthly mortgage payment. Eligibility for these loans is determined by a combination of factors related to the borrower and the property. While the government-backed Home Equity Conversion Mortgage (HECM) is the most common type, specific requirements can vary slightly for proprietary and single-purpose reverse mortgages.
Borrower Eligibility Requirements
The primary criteria for reverse mortgage approval revolve around the borrower's age, occupancy, and financial stability. These rules are in place to protect both the borrower and the lender.
Age and Residency
For a federally insured HECM, at least one homeowner on the title must be 62 years of age or older. Some proprietary reverse mortgages offer a lower minimum age, sometimes as young as 55. Regardless of the loan type, the home must be your principal residence, meaning you live there for the majority of the year. Investment properties and vacation homes do not qualify.
Home Equity and Existing Debt
To qualify, you must own your home outright or have a significant amount of equity. Any existing mortgage balance must be paid off at closing using the reverse mortgage proceeds or other funds. Having high equity is essential because the loan amount is based on the home's value, the borrower's age, and current interest rates. Additionally, prospective borrowers must not have any outstanding federal debt, though in some cases, the reverse mortgage funds can be used to pay off that debt.
Mandatory Counseling
A critical step for all HECM applicants is completing a mandatory counseling session with a HUD-approved agency. This session is designed to ensure you understand how reverse mortgages work, including the financial implications, costs, and other available options. A certificate is issued upon completion and is required by the lender to proceed with the loan. This step serves as a vital safeguard for consumers.
Property Eligibility Requirements
The home itself must meet certain standards to be approved for a reverse mortgage.
Property Type
HECMs are available for several property types, including:
- Single-family homes
- Two-to-four-unit properties (with one unit being owner-occupied)
- HUD-approved condominiums
- Manufactured homes that meet FHA requirements
Property Condition
The home must be in good condition and meet the Federal Housing Administration's (FHA) property standards. An FHA appraiser will assess the property's condition during the application process. If repairs are necessary, a portion of the reverse mortgage funds may be set aside to complete them.
Ongoing Borrower Obligations
Eligibility doesn't end at closing. After receiving the reverse mortgage, borrowers must continue to meet certain obligations to avoid default and potential foreclosure. These responsibilities include:
- Paying property taxes on time
- Maintaining homeowner's insurance
- Keeping the home in good repair
Reverse Mortgages vs. Home Equity Loans
It is important to distinguish between a reverse mortgage and other methods of tapping into home equity, like a Home Equity Loan or Home Equity Line of Credit (HELOC). These products have different eligibility requirements and repayment structures. A comparison table highlights the key differences.
| Feature | Reverse Mortgage (HECM) | Home Equity Loan (HEL) | Home Equity Line of Credit (HELOC) |
|---|---|---|---|
| Minimum Age | 62+ (youngest borrower) | Varies by lender (all ages) | Varies by lender (all ages) |
| Repayment | Not required until borrower sells, dies, or moves | Fixed monthly payments over a set term | Variable payments based on withdrawals and interest |
| Funds | Lump sum, line of credit, or monthly payments | Lump sum payment | Revolving line of credit |
| Loan Balance | Increases over time as interest and fees accrue | Decreases with monthly payments | Varies based on use and payments |
| Impact on Heirs | Repayment is generally due from the estate, typically through home sale | Loan balance is paid over term, doesn't impact inheritance after repayment | Debt must be repaid, potentially impacting inheritance |
Important Considerations
Before proceeding with a reverse mortgage, it is crucial to consider all aspects of the loan. While reverse mortgages can provide supplemental income and allow you to age in place, they also come with significant costs, including origination fees, mortgage insurance premiums (MIP), and servicing fees. Additionally, the loan balance grows over time as interest and fees are added, which reduces the amount of home equity available for your heirs. The mandatory counseling session is designed to help you weigh these pros and cons thoroughly.
Conclusion
For a homeowner to be eligible for a reverse mortgage, particularly the most common HECM, they must meet specific age, residency, and equity requirements. At least one borrower must be 62 or older, live in the home as their primary residence, and have significant equity. The property must also meet FHA standards, and all applicants must complete mandatory counseling. While reverse mortgages offer a way to access home equity without monthly payments, it's essential to understand the ongoing obligations, potential costs, and the effect on your home's equity. Considering alternatives like home equity loans and seeking financial counseling are crucial steps in making an informed decision about this financial product. Consumer Financial Protection Bureau on Reverse Mortgages
