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 basic qualifications for a reverse mortgage loan:
YOU MUST HAVE SUFFICIENT EQUITY & 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.
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.
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.
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.
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.