Hello Dale,

Your question brings up an important point that can be complex without reviewing the specifics of the property and its commercial use. HUD requires that a reverse mortgage property must be primarily residential. However, the underwriting manual does not explicitly define whether "floor space" includes all areas or only living space, leaving final interpretation to the lender’s underwriter.

HUD’s 25% Rule for Commercial Use

A property may have a legally permitted non-residential use as long as:

• The business space does not exceed 25% of the total floor area.
• The business does not compromise the home’s residential nature.
• The type of business is not disruptive or hazardous.

If you need to count the basement or garage to stay within the 25% limit, the underwriter may not approve the usage.

Types of Businesses That May Be Rejected

Certain home-based businesses may be denied even if they meet the 25% rule. For example:

• Kennels for dog boarding – Even if the kennels take up less than 25% of the home, the animals’ required space may exceed the limit.
• Beauty salons – If signage and patron parking are required, the business may be rejected.
• Bed and Breakfasts – Generally not permitted, even if using only one bedroom under the 25% threshold.
• Farms and gas stations – Properties with hazardous features or agricultural use are not eligible.

Why HUD Insurance Matters

There is no secondary market for reverse mortgages that cannot secure HUD insurance. Unlike forward mortgages, where lenders can sell non-conforming loans to specialty sources, a HECM reverse mortgage must obtain HUD insurance. If it cannot be insured within nine months, the lender has the right to call the loan due and payable.

Because of this, lenders are very cautious in ensuring a property meets HUD’s eligibility rules from the start.

For more details, check out: Reverse Mortgage Property Requirements (Updated 2025)