You may be interested in applying for a reverse mortgage, but like any loan, there are specific qualifications you will have to meet. And because the Federal Housing Administration insures most reverse mortgages, many aspects of your finances and home condition need to meet government standards for this to happen.
Some more apparent reasons 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 some other reasons might not be as obvious and that you might not even consider.
Here are the 3 qualifications for a reverse mortgage loan:
1. You must have sufficient credit
A misconception is that a reverse mortgage only looks at the equity you have in your home. Your equity will be considered along with the amount of debt you have in other areas. Your credit history can also have a significant impact on your eligibility.
A history of late or outstanding payments on credit cards, mortgages, or other loan accounts can affect reverse mortgage eligibility. In some cases, the reverse mortgage lender may suggest waiting for some time so that the borrower can repair their 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 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 your leftover or residual income. This is where the underwriter will take all your obligations (housing and other debts) and subtract them from your monthly income to determine how much money you have left to live on each month. HUD has different residual income levels required for different parts of the country depending on living costs and 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 monthly income to keep up with the estimated property charges. However, more borrowers than not are allowed 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 set aside funds borrowers must 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. Still, 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 should face that eventuality. At the same time, they still have all their equity and take appropriate steps to downsize or do 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 lender looks at all the costs you could incur over your estimated lifetime and then determines the set-aside amount accordingly. The funds are taken directly from the reverse mortgage proceeds and are used to pay for annual taxes and insurance on your home.
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 several qualifications regarding the home that all applicants must meet to obtain a reverse mortgage. Many people may think they are eligible but find out that they lack one or more qualifications for their home once they apply.
A significant component of home qualifications is ensuring 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 problems with accessing the home safely, you could be required to complete home repairs before being approved.
If fire hazards are present, you may also have to fix those. FHA also has specific requirements for manufactured homes and condominiums. 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?
Who is not eligible for a reverse mortgage?
Are there income requirements for a reverse mortgage?
What credit score is needed for a reverse mortgage?
Who determines the guidelines for a reverse mortgage?