3 Important Qualifications for a Reverse Mortgage in 2023

April 19, 2022 By Michael Branson 9 comments

You may be interested in applying for a reverse mortgage, but like any loan, there are certain qualifications you will have to meet. And because most reverse mortgages are insured by the Federal Housing Administration, there are many aspects in terms of your finances and home condition that need to meet government standards for this to happen.

There are some more obvious reasons why someone may not qualify for a reverse mortgage, such as not meeting the minimum age requirement of 62 or simply not having enough home equity. But there are also some other reasons that might not be as obvious and that you might not even be thinking about.

Here are the 3 qualifications for a reverse mortgage loan:

1. You must have sufficient credit

A misconception among some people is that a reverse mortgage only looks at the equity you have in your home. In fact, your equity will be considered along with the amount of debt you have in other areas. Your credit history can also have a major impact on your eligibility.

If you have a history of late or outstanding payments on credit card, mortgage or other loan accounts, this can affect reverse mortgage eligibility. In some cases, the reverse mortgage lender may suggest waiting for a period of time so that the borrower can repair his or her credit, and then re-apply for the loan.

The amount that you owe on your current mortgage also plays a role in your eligibility. If you do not own your home outright, you must have a low enough mortgage balance that can be paid off with the proceeds from the reverse mortgage loan. And you must still be able to keep up on taxes, insurance, and various other property charges once you have the loan. The lender will help determine this through a thorough financial assessment of the borrower.

Whereas forward or traditional loans use ratios to determine eligibility where they determine a percentage of your income as an acceptable level to be paid toward your mortgage and then a higher level to be paid toward your total debt, reverse mortgages use what is called the residual income method of qualification.

This is where the underwriter will take all your obligations (housing and other debts) and subtract it from your monthly income to determine how much money you have left to live on each month. This is your left over or residual income. HUD has different residual income levels required for different parts of the country depending on living costs and for the size of your family.

2. You must meet minimum income requirements

Many people who apply for reverse mortgages are either nearing retirement or are already in retirement, so they no longer have income from a full-time job. Social Security income is a consideration for applicants, as are any other forms of income such as part-time work or rental income.

In some cases, applicants are denied because they don’t have enough income coming in each month to keep up on the estimated property charges but more borrowers than not are given an opportunity to still obtain a reverse mortgage by setting funds aside from their loan to pay for their property charges as they come due.

This relatively new feature for reverse mortgage borrowers that can help some applicants qualify even if they do not meet the credit or income requirements is known as a Life Expectancy Set Aside or “Lee-sah.”

“Set aside” rules were implemented in 2015 allowing lenders to essentially set aside funds borrowers will need to pay for their property charges. The LESA will help borrowers with some credit issues that may not have been approved on their own but whose credit is not so terrible that it warrants a loan declination no matter what.

HUD wants to make the reverse mortgage program available to all borrowers that the loan would truly help but if the borrowers’ positions are not better even after the closing of a reverse mortgage, HUD does not want to delay the inevitable loss of the home.

In other words, if a borrower still cannot afford a home, even with a reverse mortgage, and it is clear that with their income and expenses they are heading into a situation where they would lose their home, they it is better that they face that eventuality while they still have all their equity and take appropriate steps to downsize or something else that is appropriate.

Set Aside accounts work well for borrowers who may have trouble paying taxes and insurance on the home as failure to keep these obligations current could result in the loan being called due and payable. The funds are taken directly from the reverse mortgage proceeds and are used to pay for annual taxes and insurance on your home. The lender looks at all of your costs that you could incur over your estimated lifetime and then determines the set-aside amount accordingly.

Some borrowers will be required to set aside these funds, but it’s an option for any borrower getting a reverse mortgage if they would like to choose this service. If you are required to take out a set aside, it is important to understand how much is being taken from your total amount of funds.Ask your lender upfront how a set aside may impact your proceeds.

3. Your property must meet minimum FHA standards

Aside from finances, there are also a number of qualifications regarding the home that all applicants must meet in order to obtain a reverse mortgage. Many people may think they are eligible but come to find out once they apply they are lacking one or more qualifications when it comes to their home.

A large component in home qualifications is making sure your home meets the Federal Housing Administration’s (FHA) property requirements. Most of the qualifications revolve around the safety and upkeep of your home. For example, if you have a faulty roof or there are problems with accessing the home safely, you could be required to complete home repairs before being approved.

If there are fire hazards present, you may have to fix those as well. There are also specific requirements from FHA for manufactured homes and condominiums, and some simply don’t qualify. Some condominiums and manufactured homes are HUD-approved, which means they could qualify for a reverse mortgage, but others are not. Be sure to ask your lender if your property qualifies.

Qualification FAQs:

What percentage of equity is required to qualify for a reverse mortgage?

The percentage of equity needed to qualify for a reverse mortgage will depend on the age of the youngest borrower or spouse as well as the interest rate on the loan at the time of applying. As of 2021 the best-case loan to value for a 62-year-old is 52.4% (if expected rate reaches the floor for the calculator) and that loan to value will increase slightly for each higher age and caps at 75% loan to value for age 92 or older. If you have a spouse that is under the age of 62, they would also be covered by the reverse mortgage but the amounts would be lower based on the age of the eligible spouse.

Who is not eligible for a reverse mortgage?

There are several factors to determine whether someone would be ineligible for a reverse mortgage loan. Some of the most common factors would be Age, Occupancy, Credit, and equity. To get a reverse mortgage you must meet the minimum age requirement; you must occupy the property as your primary residence; you must have good credit or enough equity to allow for a life expectancy set aside for taxes and insurance if you do not; and you must have enough equity in the property to pay off the existing loan(s) or the financial capacity to pay the difference at time of closing.

Are there income requirements for a reverse mortgage?

There are in fact income requirements for a reverse mortgage. In order to qualify for a reverse mortgage, you must meet the set minimum residual income requirement for the product type you are applying for and how many occupants there are living in your home. Residual income is typically an easier income qualification than a traditional loan that goes by a debt ratio requirement. For example, if your total calculated monthly expenses are $2,000 for a family size of 1 and your income is $3,000 you have a 67% debt ratio, but your residual income is $1,000. This is a scenario that does not meet standard loan guidelines for a traditional mortgage but would be eligible for a reverse mortgage

What credit score is needed for a reverse mortgage?

For the government insured reverse mortgage (HECM) there is no minimum credit score requirement. Credit qualifications are based on the overall picture of an applicant’s credit history with the most emphasis placed on payment history.

Who determines the guidelines for reverse mortgage?

For the HECM program, HUD (Department of Housing and Urban Development) sets the base guidelines for the programs and individual Lenders also have their own guidelines as well. When it comes to proprietary programs those guidelines are determined solely by the Lenders offering those products.

HUD/FHA Qualification-Resources:

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About the Author, Michael G. Branson | Mike@allreverse.com

Michael G. Branson CEO, All Reverse Mortgage, Inc. and moderator of ARLO™ has 40 years of experience in the mortgage banking industry. He has devoted the past 18 years to reverse mortgages exclusively.

9 Comments on this Article

Richard S.
April 11th, 2022

Hi Arlo,

I wonder why the lender couldn't simply deduct the amount of the set-aside from the available loan balance, rather than requiring an upfront cash payment. Please advise. Thank you for your assistance.
Reply to Richard
- ARLO™
  April 19th, 2022
  
  Hello Richard,
  
  The set aside is money that is typically set aside from the loan proceeds and then the borrower would receive any leftover funds from the loan to use for their purposes. The only time that it would be required for the borrower to bring cash in would be if the payoff of any existing loans plus the set aside amount plus any costs to get the loan exceeded the principal limit or loan amount the borrower would receive on their reverse mortgage.
  For example, if a borrower's Principal Limit (loan amount) from their reverse mortgage is $200,000 and their costs are $10,000, their existing loan amount is $190,000, there is only enough money in the loan to pay off the existing loan and the costs of the new loan ($200,000 loan available Minus $190,000 Loan Payoff Minus $10,000 Costs equals $0 funds remaining).
  If a LESA (Life Expectancy Set Aside) to pay the taxes and insurance is required under HUD's financial assessment guidelines and that would require another $35,000 to be set aside, there is no money left to set aside in this example.
  The only way this borrower could close the loan would be if they wanted to bring the funds into closing. If this borrower only had a $100,000 existing home loan to pay off, then they would use $100,000 to pay off the existing mortgage, $10,000 for their costs and $35,000 would be set aside to pay their taxes and insurance as they became due.
  The remaining $55,000 would be available to the borrower in accordance with HUD's disbursement rules for obtaining cash ($200,000 Reverse Mortgage available Minus $100,000 Existing Loan Payoff Minus $10,000 Costs Minus $35,000 set aside for future costs equals $55,000 remaining for borrower to use).
  
  It is important to also note that the set aside funds are not a fee and are not considered money borrowed until they are actually used to pay the borrowers taxes or insurance expenses. And then, only the portion of the set aside funds actually used at that time are added to the amount owed. So, the $35,000 is set aside and does not accrue any interest owed until actually used.
  So, if the first installment of taxes is paid by the lender 4 months later for $500, then $500 of the set aside funds would be paid to the tax collector by the lender and at that time transferred to the balance owed and interest would begin accruing on that portion of the set aside funds just the same at the other balance owed by the borrower.
  
  So the only thing I can surmise from your statement is that there was not a sufficient amount of money available to you on the loan to pay the existing loan off, the costs of the new loan and your set-aside balance without exceeding the loan based on your age, property value and HUD limits. Otherwise, the lender would have set the funds aside from the available proceeds of the loan.
  That is why they call it a set-aside, because the funds are meant to be set aside from your available proceeds and used to pay your taxes and insurance but then if there is not enough money to set aside to cover the amount needed, you either need to bring cash in to close the loan or the loan would be denied.
  Reply to ARLO
Bill
January 17th, 2022

If i have 50% equity and meet all other requirements do i qualify for reverse mortgage?
Reply to Bill
Tom Z.
February 15th, 2021

Do homes in reverse mortgage ever really go into default due to lack of maintenance upkeep? It's a strict rule and very well-known but how could that ever really happen? So they title holders come out one day and inspect, make a decision and the next day you're out of your home? Just like that? Isn't there a grace period or something?
Reply to Tom
- ARLO™
  February 18th, 2021
  
  Hello Tom,
  
  The only way I can answer this is "it depends on the circumstances".
  About maintenance, I have seen servicers work with borrowers to resolve issues for which Homeowner Associations and municipalities have filed notices to correct and I have seen them move with more urgency when those notices were concerned with health and safety issues that could result in additional follow up issues, liens or potential liability.
  I know that occupancy is a huge concern as non-owner-occupied properties cost HUD millions each year due to vacancies, deferred maintenance and keeping loans on the books that should have been called sooner (that continue to accrue interest and increase the HUD losses).
  If the occupancy is questionable at the time a lender does an inspection, they may schedule for additional inspections. If they determine that the borrower is not living in the home, that is a breach of the terms and that loan would most likely be called due and payable immediately, there would be no grace period.
  Reply to ARLO
Juan R.
May 7th, 2020

Which is the youngest age a person can apply for a reverse mortgage? Thanks.
Reply to Juan
- ARLO™
  May 11th, 2020
  
  Hello Juan,
  
  You must be 62 to get a reverse mortgage under the government-insured HECM program.
  Reply to ARLO
Lynda Haight
June 29th, 2017

Hello, I married a man who already had a reverse mortgage. If he passes, am I eligible to remain in the home? As far as we can see, I will not be able to, and will be forced to leave my home a year after his demise? This ruling needs to be reassessed, as it will be a huge hardship for me, as I have nowhere to go. I am already 73 years old, and I can't even imagine leaving my home! Please advise! Thank-you, Lynda A. Haight
Reply to Lynda
- ARLO™
  June 29th, 2017
  
  Hi Linda,
  
  If you were not an original borrower or eligible non-borrowing spouse at the time the loan was originated, then the loan would be due and payable at the time the borrower permanently leaves the home. HUD has no plans to revise this policy to my knowledge as the benefit is derived based on the age of the youngest borrower on the loan and borrowers can live in the property for the rest of their lives without having to make a payment. If solely by marrying a younger spouse later the loan would not be due and payable based on the original provisions and the new spouse were able to remain in the home for the rest of his/her life as well, the risk to HUD would not be something they could not quantify and the program would not work. HUD can only underwrite the loan based on the known parameters at the time the loan is granted and insured.
  
  However, having said that, you and your husband can refinance the loan now in both your names so that you would both be covered with the new loan. There may or may not be enough equity in the home at this time to allow you to do the loan without having to bring cash in the close the loan, but HUD does allow you to bring the cash in if it is required. I don't know how much equity is in the home or how the property set to be settled at that time, but the best bet would be to have the situation resolved in advance if at all possible.
  Reply to ARLO

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