You may be interested in applying for a reverse mortgage, but like any loan, there are certain qualifications you’ll 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 in order for this to happen.
There are some more obvious reason 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 you might not think about right off the bat.
Here are a few main reasons you may not qualify for a reverse mortgage.
Sufficient Equity / Debt and credit issues
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 don’t 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.
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. However, there is a relatively new feature for reverse mortgage prospective borrowers that can help some applicants qualify even if they do not meet the credit or income requirements.
“Set aside” rules were implemented in 2015 allowing lenders to essentially set aside funds they will need to pay for their property charges. 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 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.
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 on 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 on 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.