Does the property have to be 5 acres or less?

Wow, I wish I could answer this question in as few words as you asked!  Unfortunately, though, this is going to take a little longer. Because if I had to answer it in just a couple of words, I would have to say, “it depends”.

We get this question often, and so I will try to give you an answer that doesn’t get too lengthy but also covers enough to be meaningful.

No Maximum Acreage Defined by HUD 

HUD does not have a magic number of acres that your property cannot exceed to be eligible for a reverse mortgage. 5 acres is a guideline many lenders have established, but this is not a firm rule. More so than the absolute size of the parcel, the heaviest consideration is given to the conformity to the other sales in the area (thereby demonstrating marketability), the use of the property (cannot be agricultural usage or more than 25% business), and the majority of the value should not be in the land.

The appraiser must find recent comparable sales as part of the appraisal process, and your property must be similar to those sales. If all the sales in the area are 7-10 acres, requiring the appraiser to make minimal adjustments to your property, which is also about the same size, and the properties are not being used for agricultural purposes, then the property size is not a significant issue.

If, however, the other sales in the area are all on much larger or much smaller parcels and there are no sales of similar-sized properties available, then any adjustments the appraiser makes to arrive at a value are entirely subjective and not allowed by HUD. Furthermore, the value of a property of significantly different size is not substantiated if there are no comparable sales of similar size available, and the marketability of that property is also not established.

If no homes on that sized parcel are selling, it could be because that sized parcel is not readily accepted by homebuyers in that market, and HUD does not want to insure a loan on such a property, making the property unacceptable for a reverse mortgage.

Ineligible Property Types 

As I stated, HUD does not insure loans on commercial and agricultural properties. We sometimes encounter properties that lack a current crop in the ground, yet they are zoned agricultural and have an agricultural highest and best use.

This would render a property ineligible.  This would be true if the property were 5 acres or 25 acres, so it’s not always just the size that counts. Finally, we have had some borrowers who have done lot divisions and placed the reverse mortgage on the parcel with the dwelling after the division, when it made sense.

Recently, there was a case where the lot was approximately 35 acres, and the sales in the area were all less than 5 acres; consequently, the borrowers could not obtain a reverse mortgage. They chose to do a lot split, making one parcel of 32 acres and one of 3 acres (the same size as most of the other homes in the area), and then do their reverse mortgage on the dwelling with 3 acres.

Before you run out and subdivide your parcel, I would caution you, though. There may be tax ramifications on the taxation of the new parcels. You need to be sure that the sales are available for other-sized parcels, that it will not be an exercise in futility and expense, and that it will not injure either of your parcels.

Before taking any action, I would always suggest gathering as much information as possible.

Make sure to check zoning laws 

Check with the authority responsible for zoning, the taxing authority, a local surveyor, a real estate attorney, and possibly even a knowledgeable real estate professional to determine the effect of the proposed actions on value. Please forgive me for getting so long-winded. The truth of the matter is that the property being over 5 acres does make the loan a bit tougher and the appraisal will receive more scrutiny, but it does not mean that it is an automatic disqualifier.

The only way to be 100% sure is to have an appraisal done and see what sales are available in the area, but often, we can look at the information available to us and get a feel for that availability. If you already have an appraisal, please feel free to send us a copy. We’ll review it and let you know our findings, all at no cost to you.

ARLO recommends these helpful resources: 

• Reverse Mortgage Property Requirements
• Property Q&A
• HUD.GOV – Excess Land Rules