How to Qualify for a Reverse Mortgage: Key Requirements Explained

June 11, 2024

If you’re considering a reverse mortgage, you must meet specific qualifications. In this article, we will discuss the requirements for obtaining a federally insured reverse mortgage.

We’ll highlight the key differences between government-insured and private programs and provide guidance on how to best prepare if you decide that a reverse mortgage is right for you.

Table of Contents

• Credit Considerations for Reverse Mortgages

• How to Meet Income Requirements for a Reverse Mortgage

• LESA Explained

• Understanding Property Standards for Reverse Mortgage Eligibility

• Frequently Asked Questions

Credit Considerations for Reverse Mortgages

While your home equity is crucial, it’s not the only factor in obtaining a reverse mortgage. Your overall debt and credit history also play significant roles.

Credit History Matters

Your credit history is important. If you’ve had issues with late or unpaid bills, such as credit cards, home loans, or other types of debts, this could impact your eligibility for a reverse mortgage. If you’ve been late on important payments like taxes, insurance, or homeowners association fees in the last two years, you may still qualify, but the lender might need to set aside part of your loan to cover these future bills. This arrangement, known as a Life Expectancy Set Aside (LESA), ensures these costs are paid on time using funds from your reverse mortgage.

In some cases, if your payment history has been inconsistent, lenders might advise you to improve it before reapplying to increase your chances of approval.

Current Mortgage Balance

The amount you currently owe on your home mortgage is also a key factor. If you still have a significant mortgage balance, the reverse mortgage must be large enough to pay it off. If not, you would need to contribute the difference in cash when closing the loan.

HUD requires lenders to perform a financial assessment to determine if you can manage ongoing property expenses like taxes and insurance after getting the reverse mortgage. The goal is to ensure that the reverse mortgage is sustainable and that you can comfortably live in your home without financial strain.

How to Meet Income Requirements for a Reverse Mortgage

Income Sources

As many applicants for reverse mortgages are retired or nearing retirement, full-time job income is less common. However, income sources like Social Security, part-time work, and rental income are all considered during the application process.

Income Assessment

Reverse mortgages differ from traditional loans in how they assess your financial eligibility. Instead of using debt-to-income ratios, reverse mortgages focus on your residual income.

Residual Income

Residual income is what remains from your monthly income after you’ve paid all your monthly bills, such as housing costs, other debts, and utilities. The lender will evaluate this amount to determine if you have enough left to comfortably cover your living expenses. HUD adjusts the required amount of residual income based on your location and family size because the cost of living and expenses can vary greatly—for example, supporting a family of four or living in California requires more monthly income than supporting a single person in Mississippi.

It’s worth noting that those interested in non-governmental, jumbo, or private reverse mortgage programs will generally need to demonstrate solid credit and reliable income to qualify.

LESA Explained

Income and Credit Challenges

Sometimes, not having enough monthly income to cover ongoing property expenses can prevent approval for a reverse mortgage. However, a solution known as Life Expectancy Set Aside (LESA) can help. By setting aside funds from the loan to cover taxes and insurance, it reduces the monthly financial burden, making it easier to meet qualification requirements.

What is a LESA?

LESA is designed to help applicants qualify by using reverse mortgage funds to cover essential property charges, effectively augmenting their income. This is particularly useful for applicants whose income is below the required threshold or those who have credit issues that might increase their risk of defaulting on property taxes and insurance.

Why a LESA?

HUD’s goal is to ensure that reverse mortgages benefit those who are truly in need and can sustainably manage their expenses with the loan. If a reverse mortgage doesn’t significantly improve a borrower’s financial stability, it’s better for them to consider downsizing or other housing options while they can still fully benefit from their home equity rather than depleting it and facing potential displacement later.

How the LESA Works

LESA calculates the expected costs for taxes and insurance over your life expectancy and reserves funds from your loan to cover these expenses annually. This preventive measure is crucial as failing to keep up with these payments can jeopardize the loan’s status. It’s important for borrowers to consider that if they outlive the funds set aside in LESA, they may need to resume paying these charges out of pocket. Planning for this eventuality by saving during the years LESA covers payments can provide a safety net.

Choosing a LESA

For some, LESA is mandatory, but it’s also an optional safeguard for any borrower who values peace of mind regarding their property charges. Before opting for LESA, understand how it affects your available loan amount and consider the commitment carefully; once established, reversing the decision generally requires refinancing. Discuss with your lender how LESA will impact your reverse mortgage proceeds and review all terms before finalizing your decision.

Note: LESA is not available with private or jumbo reverse mortgages.

Understanding Property Standards for Reverse Mortgage Eligibility

Home Qualifications

To qualify for a reverse mortgage, your home must meet certain standards outlined in the HUD property manual. These standards ensure that the home is primarily residential and not used for agricultural or commercial purposes. For instance, homes on agricultural land or in commercial zones are not eligible. It’s essential to discuss these specifics with your loan originator if your home serves non-residential functions.

HUD’s program is open to properties with 1-4 family units, provided you live in the primary unit. There are also specific rules for manufactured homes and condominiums. Not all condominiums qualify; they must be part of a HUD-approved project. If you own a higher-valued condominium that isn’t HUD-approved, private reverse mortgage programs might be an option, although these still require lender approval.

FHA General Property Requirements

Your home must also adhere to the Federal Housing Administration’s (FHA) property standards, which are largely focused on safety and maintenance. Common issues that might need addressing include a faulty roof, peeling paint, missing smoke detectors, or improperly secured water heaters. Some repairs can be minor and addressed easily, while others might be more significant and require completion before or even after your loan closes, using funds specifically set aside for repairs.

There are also stringent requirements regarding the property’s location and features. For example, homes too close to gasoline tanks, under high voltage wires, without a permanent water source, or lacking adequate heating in colder regions might not qualify. Sometimes, issues like zoning restrictions only come to light during the appraisal process and can disqualify a property.

Safety Concerns

If an appraisal identifies any issues that could pose a health or safety risk, such as fire hazards or structural dangers like missing stairs, these repairs will likely need to be completed before you can close on your loan.

Frequently Asked Questions

What Percentage of Equity is Required to Qualify for a Reverse Mortgage?

The amount of equity you need to qualify for a reverse mortgage depends on several factors, including the age of the youngest borrower or eligible non-borrowing spouse and the current interest rates at the time of application.

For a typical 62-year-old borrower, the loan-to-value ratio — which indicates the percentage of your home’s value that you can borrow against — starts at about 37%. This percentage increases slightly with each year of age, capping at 72% for those aged 92 or older.

If a spouse is under the age of 62, they can still be included in the reverse mortgage agreement, but the loan amount available will be lower based on the age of the youngest eligible spouse.

Jumbo or Private Programs

For homes valued significantly above the HUD maximum lending limit, currently set at $1,149,875, jumbo or private reverse mortgage programs might be suitable. These programs generally offer lower loan-to-value ratios but can still provide a substantial loan amount due to the higher overall value of the home. Jumbo programs can start at age 55 in some states, though others may require the borrower to be at least 62, depending on state regulations.

Who is Not Eligible for a Reverse Mortgage?

Eligibility for a reverse mortgage is determined by several key factors:

Age: You must meet the minimum age requirement to qualify for a reverse mortgage, which is typically 62 years old.
Primary Residence: The property must be your primary residence, meaning you live there most of the year.
Credit: Good credit is important, though it’s possible to qualify with less-than-perfect credit if you have sufficient equity in your home to cover a life expectancy set aside (LESA). This set aside helps manage the ongoing costs of taxes and insurance.
Equity: You need enough equity in your home to either pay off existing mortgages or have the financial capacity to cover the difference at closing.

If you don’t meet these criteria, you may not be eligible for a reverse mortgage.

Are There Income Requirements for a Reverse Mortgage?

Yes, there are income requirements for obtaining a reverse mortgage. To qualify, you must meet the minimum residual income requirement specific to the type of reverse mortgage you are applying for and the number of people living in your home.

Understanding Residual Income

Residual income is the money you have left each month after paying all your debts and living expenses. This method of assessing income eligibility is generally more forgiving than the traditional debt-to-income ratios used in standard mortgages.

Example:

Monthly Expenses: $2,000
Monthly Income: $3,000
Debt Ratio: 67%
Residual Income: $1,000

In this example, while the debt ratio might disqualify you for a traditional mortgage, the $1,000 residual income would make you eligible for a reverse mortgage. This illustrates how reverse mortgages are often accessible to those who might not qualify for other types of home loans due to the different criteria used to evaluate financial stability.

What Credit Score is Needed for a Reverse Mortgage?

There is no specific minimum credit score required for a government-insured reverse mortgage (HECM). Instead of focusing on a credit score, the eligibility criteria emphasize an applicant’s overall credit history, particularly how reliably they have made payments in the past.

This approach allows for a more comprehensive assessment of a borrower’s financial behavior, ensuring that those with a strong payment history are considered, even if their overall credit score isn’t high.

Who Determines the Guidelines for a Reverse Mortgage?

The guidelines for the Home Equity Conversion Mortgage (HECM) program, a type of reverse mortgage, are primarily established by the Department of Housing and Urban Development (HUD). HUD creates the foundational rules that all lenders must follow.

Lender Requirements: While HUD sets the core guidelines, each lender has the authority to establish their own specific underwriting criteria within the framework provided by HUD. This means that while all lenders must adhere to HUD’s strict rules, such as using HUD’s Electronic Appraisal Delivery system for appraisals, they have some flexibility in areas like income underwriting.

Enforcement: It is crucial for lenders approved by HUD to ensure their underwriting processes comply with HUD standards. If the underwriting does not meet HUD’s criteria, HUD can refuse to insure the loan. This is particularly important for aspects like condominium approvals, which must align with HUD’s approved list—a mandatory rule.

Private or Jumbo Programs: For private or jumbo reverse mortgage programs, the guidelines and lending requirements are set entirely by the lenders who offer these products, independent of HUD rules.

Does Your Mortgage Need to Be Paid in Full to Qualify for a Reverse Mortgage?

No, your existing mortgage does not need to be fully paid off to qualify for a reverse mortgage. In fact, many borrowers use the funds from a reverse mortgage to pay off their existing mortgage balances, thus eliminating monthly mortgage payments.

Financial Assessment and Payment History

HUD conducts a financial assessment when evaluating borrowers for a reverse mortgage. If you have had any late payments on your mortgage, taxes, insurance, or homeowners association (HOA) dues within the past 24 months, you might be required to set aside funds specifically to cover future tax and insurance payments. This is known as a Life Expectancy Set Aside (LESA).

Impact of LESA

The amount required for LESA can vary significantly based on several factors:

Age: Younger borrowers in their early 60s may face a substantial LESA if their taxes and insurance costs are high.
Taxes and Insurance Costs: A smaller LESA might be needed if these costs are low or if the borrower is older.

It’s important to inform your lender about any late payments related to property charges early in the process. This transparency allows them to provide a more accurate estimate of what you can expect from your reverse mortgage, ensuring there are no surprises regarding the final loan amount after accounting for any necessary LESA.

HUD/FHA Qualification-Resources:

FHA/HUD Financial Assessment Guidelines

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Have a Question About Reverse Mortgages?

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Post your question in the comments below and anticipate a personalized response from Mr. Branson himself, typically within one business day. He's here to illuminate all angles of reverse mortgages, ensuring you're equipped with the knowledge to make informed decisions. Take this opportunity to gain insights from a seasoned professional.

11 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
- Michael Branson
  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 Michael
Bill
January 17th, 2022

If i have 50% equity and meet all other requirements do i qualify for reverse mortgage?
Reply to Bill
- Carol C.
  June 6th, 2024
  
  Hi Michael,
  
  If you end up with a set-aside amount of $35,000, do you pay the taxes and insurance out of your own pocket, or does it come out of the set-aside automatically every time they are due?
  
  Thank you,
  
  Carol
  Reply to Carol
  - Michael Branson
    June 8th, 2024
    
    Hello Carol,
    The servicer will pay the taxes and insurance when they are due. It's actually a pretty good deal for borrowers, and let me explain why. It's true, you don't get to use the $35,000 you mentioned for other purposes, but if you didn't specifically need those funds, that portion of the line is "set aside" and those funds are not borrowed money until the servicer sends them to the taxing authority or the insurance company. If your taxes are $2,500, then that amount is sent to your tax assessor and added to your loan balance. The remainder of the set-aside are unborrowed funds on your line and continue to grow under the same terms as the rest of the line of credit.
    Many people ask, "What happens to the set-aside funds if I don't use them all by the time I pay off the loan or pass away?" But that's another common misconception about the set-aside account. The lender isn't holding funds in a bank account somewhere. Since those are funds you didn't use, they just don't need to be repaid. For a very simplified example, let's say your reverse mortgage is for $200,000, $35,000 of which is set aside for taxes and insurance purposes. If you pay off the loan early or your heirs pay the loan off after you pass, you or they pay off the amount you borrowed plus whatever interest accrued on that money. If you only ever took $100,000 in draws and the lender only used $10,000 to pay your taxes and insurance (from the set-aside), the amount you or your heirs would owe would be the $110,000 you borrowed and the lender paid on your behalf from the funds set aside, plus the interest that accrued on that amount.
    There is no money to be recovered from an account somewhere, but you also never borrowed that portion of the line available to you, so you don't have to pay it back. Think of it like a credit card with a $10,000 line of credit on which you only spend $1,000. When you close the card, you only pay off what you owed plus any interest on that amount, not the entire $10,000 just because that was the amount available to you. The reverse mortgage set-aside is still just money available to you for the payment of taxes and insurance, but they are not "spent" or borrowed until the lender actually sends them to your tax assessor or insurance company. Now you do not need to worry about the taxes being paid on time for as long as your set-aside account is active.
    One thing to remember is that the account is called a LESA for a reason. It is a Life Expectancy Set Aside. It is only set to last for the expected life of a borrower. This means that you can outlive the account and may need to start paying your taxes and insurance in the future. If you determine the amount of your taxes and insurance annually, you will see that the funds set aside in the LESA account will not last until you are 100 years old because that is not the life expectancy for the vast majority of borrowers. My advice to all borrowers with a LESA is to start putting money into a separate account right away for the future payment of taxes and insurance. If you never need the funds for taxes and insurance, you can use them for something else later, but it's easier to start saving when all other payments for the house are suddenly gone than to wait and then face taxes and insurance obligations again should you outlive your LESA account.
    Reply to Michael
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
- Michael Branson
  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 Michael
Juan R.
May 7th, 2020

Which is the youngest age a person can apply for a reverse mortgage? Thanks.
Reply to Juan
- Michael Branson
  May 11th, 2020
  
  Hello Juan,
  
  You must be 62 to get a reverse mortgage under the government-insured HECM program.
  Reply to Michael
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
- Michael Branson
  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 Michael

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