If you’re applying for a reverse mortgage for the first time, you will be subject to meeting income requirements as part of the financial assessment underwriting guidelines.  The financial assessment for a reverse mortgage is much like the process for getting a traditional or “forward” mortgage.

It’s a way for the lender to understand your financial situation and determine that you’ll still be on solid financial footing after getting the reverse mortgage.  In addition to credit analysis, income is one of the most critical components of the financial assessment.

But income may be more complex than it sounds.  In addition to the most traditional types of income you might have, such as Social Security or income from a full-time job, your lender will ask for all types of income.

residual income table

Types of income 

Employment income — This is the most traditional type of income.  It’s income you earn through working for an employer.

Documentation: Your lender will ask for your IRS Form W-2, which should document your income on a calendar year basis.  The lender must verify two years of employment and income with documentation.

You will also need pay stubs for at least the most recent 30 days and one additional form of employment verification, such as a statement from your employer.  (Some alternative forms of documentation may apply.)

Non-borrowing spouse or other household member income — If you are getting the reverse mortgage, your spouse will not be named on the loan, or if someone lives in your home but does not own the home and will not be named on the loan, their income may also apply.

It’s not considered income for the purposes of the lender’s assessment, but it’s worth mentioning and documenting in case it can help show a more accurate picture of your finances.

Documentation: You’ll need to provide the Social Security number of the person whose income you’re including and the documentation required for your own employment income.

Part-time employment income — generally covers less than 40 hours per week.

It counts toward your income under the financial assessment if you have had the job for at least two years and are likely to continue in the job.  If your wages have changed, your lender will average your wages over time.

Overtime and bonus income — Additional income that falls outside your average salary in the form of overtime or bonuses.

The lender must verify that it has been received for at least the past two years and is likely to continue.

Seasonal employment income — This may be earned on a seasonal basis rather than a year-round basis.

Again, it must have been earned for at least the last two years and is reasonably likely to continue the following season.

Accessory Dwelling Unit (ADU) — A smaller housing unit on a property, often called an ADU, can bring in rental income.  If you want to use this rental money to help qualify, the underwriter must check how much you can earn from your ADU.  The lender will ask for specific forms that show the usual rent prices in the area.  If you already have future rental agreements, the bank might want to see those, too.

Other considerations

There are other types of income and benefits that the lender will take into consideration that are worth noting.

These include things like:

  • Employer housing subsidy
  • Income from employment from a family-owned business
  • Self-employment income
  • Commission income
  • Rental income
  • Disability benefits
  • Pension or retirement benefits
  • Annuity income
  • VA benefits
  • Social Security
  • Disability
  • Workman’s compensation
  • Public assistance
  • Interest, dividend, and trust income

ARLO teaching income requirements

Income FAQs

Q.

What are the residual income requirements for a reverse mortgage?

Residual income is the remaining amount of income after all other obligations have been paid.  HUD requires different amounts of residual income based on family size and where the property is located (due to cost of living differences nationwide).  The lowest required residual income is $529 per month (for a family size of 1 in the Midwest and South) and as high as $1,160 per month (for a family size of 4 or more in the West).
Q.

Is a debt-to-income ratio (DTI) required for a reverse mortgage?

Reverse mortgages do not consider debt-to-income ratios and instead rely on a residual income analysis to determine eligibility, which is a more accessible threshold to meet.  For example, if a single person in the state of California had a monthly income of $3,000 and total monthly expenses of $2,000, they would have a 66.67% Income Ratio ($2,000/$3,000), which would not qualify you for most (if not all) traditional mortgages.  However, for a reverse mortgage loan utilizing a residual income analysis, this person would have a $1,000 residual income ($3,000 – $2,000) and meet the minimum requirement of $589 for a family size of 1 in the West.
Q.

Can assets count as a source of income?

When considering stable monthly income for reverse mortgage borrowers, HUD will consider all the exact income requirements as a forward or traditional loan.  Additionally, reverse mortgage borrowers get to use what is known as Asset Dissipation.  Asset Dissipation is a calculation whereby you divide the totality of liquid assets verified by a borrower by their life expectancy from the actuarial tables to derive an adequate income on paper to aid in the residual income analysis.  When you divide $150,000 by 180 months, you get $833.33 per month in the income you get to add to their other “traditional” pay for the residual income analysis.  This calculation can also consider the remaining available funds from the reverse mortgage.  For example, if a borrower with a 180-month life expectancy has $100,000 in a savings account and receives $50,000 in net proceeds from the reverse mortgagee, they have $150,000 that can be dissipated.
Q.

Why do lenders care about income if there are no monthly payments?

Borrowers must demonstrate that even with the reverse mortgage, they have adequate income to continue to live in the home comfortably, paying installments of taxes, insurance, and all other property charges as due because non-payment would constitute a default under the loan terms.  Compile documentation and discuss any income or assistance you receive with your lender.  Working through the financial assessment and qualifying for your reverse mortgage may be necessary.

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