Hi Cherry,

Good questions, and they are all related.  Let me work through each one.

Is there a maximum loan-to-value?

Not in the traditional sense.  A reverse mortgage does not use a fixed LTV ratio the way a forward mortgage does.  Instead, HUD uses a formula called the Principal Limit, which determines the maximum amount available to you based on three things: the age of the youngest borrower or eligible non-borrowing spouse, the home's appraised value up to the current national lending limit (which is [hecm_limit year="current"]), and the current expected interest rate.

Older borrowers qualify for a higher percentage of their home's value.  Lower interest rates also increase the available amount.  The Principal Limit Factor tables published by FHA translate those inputs into a specific dollar figure for each borrower's situation.

One additional rule worth knowing - during the first 12 months after closing, most borrowers are limited to drawing no more than 60% of the Principal Limit.   You can draw more if you have mandatory obligations, such as an existing mortgage payoff, that require it; otherwise, the first-year limit applies.

Does the property need to be paid off?

No.  You can have an existing mortgage on the home.  However, any existing mortgage or lien must be paid off at or before closing.  In most cases, the reverse mortgage proceeds are used to satisfy that balance at closing.  If the reverse mortgage proceeds are not enough to cover the full payoff, you would need to bring the difference to closing out of pocket.  If the home is free and clear, the full proceeds go to you in whatever payment form you choose.

Are the documentation requirements the same as for a regular loan?

Yes and no.  Full documentation is required, but the focus differs from that of a traditional or forward mortgage.  There is no debt-to-income ratio in the traditional sense, no employment verification for most borrowers, and no minimum credit score.

What HUD does require is a Financial Assessment, which looks at two things: your willingness and your capacity to meet ongoing obligations.  Willingness is evaluated through your credit history and your property charge payment history - taxes, insurance, HOA dues - for the past 24 months.  Capacity is evaluated through residual income analysis, which is your monthly income minus your monthly expenses and property charges.  If you fall short on either measure, the underwriter looks at extenuating circumstances and compensating factors, or may require a Life Expectancy Set-Aside (LESA) to cover future property charges.

So while the documentation package is substantial - credit report, income verification, property charge history, tax returns in some cases - the underwriting lens is different from what you would encounter on a conventional loan.

Reference: HUD Handbook 4000.1, Section II.B.3.d - Principal Limit (PDF pages 592-594) and Section II.B.5 - Financial Assessment (PDF pages 616-656).