Key takeaways
- Reverse mortgages allow seniors to tap into their home equity to supplement income and pay expenses during retirement.
- Reverse mortgages come with age, residency, equity and debt guidelines the borrower must meet to get approved.
- If you don’t qualify for a reverse mortgage, a home equity loan, cash-out refinance or HELOC could be a viable alternative.
Reverse mortgages are a way for older Americans to use the equity in their homes to fund retirement, to supplement income and pay expenses while still allowing them to live in the home. Such a loan involves the lender paying the homeowner each month a sum rather than the homeowner making payments to the lender (the reason it’s a “reverse” mortgage).
Make no mistake, though: While it can seem like free money, a reverse mortgage is an interest-charging loan, and a lien on your home. If you’re considering this route, here’s what you need to know about reverse mortgage requirements.
What is a reverse mortgage?
Reverse mortgages are a type of loan designed for homeowners who are 62 and older. These loans allow for borrowing against the equity in a home (the portion you own outright) and receiving the distribution from the loan in the form of ongoing tax-free payments. The payments are made by the reverse mortgage lender.
“The major benefit of a reverse mortgage is the cash-flow benefit of eliminating the monthly mortgage payment, as well as accessing equity in the form of a line of credit or lump sum payment,” says David Reyes, founder and chief investment officer at Reyes Financial Architecture, a San Diego, Calif. financial planning firm.
The funds do have to be repaid when you die, when you permanently move out of the home or when you sell it.
Age requirements for a reverse mortgage
The age requirement for a reverse mortgage is an important qualifying factor. In order to be eligible for the type of loan you must be 62 or older: That’s the minimum set for government-sponsored home equity conversion mortgages (HECMs) and most private reverse mortgages. However, a small number of lenders do have a lower age requirement for reverse mortgages, with options for people as young as 55.
Financial requirements for a reverse mortgage
A variety of requirements come with reverse mortgages. For instance, you must participate in counseling that’s provided by a HUD-approved reverse mortgage counseling agency.
During the counseling session, an agent will review your eligibility for a reverse mortgage and also discuss the financial ramifications. Those who take out a reverse mortgage loan when they’re too young risk running out of money later in life, during a time when it’s likely income will be lower and healthcare bills may be steeper.
On the financial front, reverse mortgages require that you not be delinquent on any federal debt, such as income taxes or federal student loans. You must also be willing to set aside some of the reverse mortgage funds at closing (or have enough of your own money) to pay for items such as property taxes and homeowners insurance.
Property requirements for a reverse mortgage
There are also property requirements associated with reverse mortgages. Specifically, the home you’re seeking a reverse mortgage on must be your primary residence. That means it must be the address where you spend most of the calendar year. Additionally, your home needs to be in livable condition. If it’s not, your lender may ask you to make improvements before approving your reverse mortgage. The funds you have in reserve should be able to meet home maintenance and repair costs.
In order to qualify, you must also have sufficient equity built up in the home — that is, you must own a significant portion (if not all) of it outright, and have paid off most of the mortgage. If you do have an outstanding mortgage balance, you’ll need to settle it when you close on the loan. You will probably need to pay off other home-secured debts, like home equity loans or lines of credit (HELOCs), as well.
Alternatives to reverse mortgages for those that don’t qualify
Many financial experts suggest treating reverse mortgages as a last resort since it often doesn’t make financial sense to sacrifice home equity for income. And not every applicant will qualify for one. So consider some of the following alternatives:
- Home equity loan: If you need a lump sum of cash for a specific expense, you can access your home equity by getting a home equity loan. Basically a second mortgage, these fixed-rate loans can be a low-cost way to borrow, even for younger homeowners who have sufficient equity.
- Cash-out refinance: Cash-out refinancing, like a home equity loan, lets you turn your home equity into cash you can use for other purposes. However, instead of multiple loan payments, you refinance your entire mortgage and have just one payment. This can also help you reduce your interest rate and adjust the loan’s term.
- Home equity line of credit: The most flexible option is a home equity line of credit (HELOC). With a HELOC, you can draw funds from your equity only when you need to, which could be appealing to people who seek out a reverse mortgage to cover ongoing expenses.
Reverse mortgage requirement FAQ
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A reverse mortgage is not free money — interest and fees will be added to your mortgage balance each month. Current fixed interest rates on a HECM fixed-rate reverse mortgage range from about 7.56 percent to about 7.93 percent. This is a little steeper than traditional mortgage rates, which are currently averaging about 6.86 percent.
Because you’re charged interest on the loan, the amount you owe will go up. In addition, you’ll still need to pay property taxes and homeowners insurance.
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The loan amount available through a reverse mortgage depends on the age of the borrower (or the age of the youngest spouse when there’s a couple), as well as the home’s appraised value, current interest rates. In the case of the HECM program, there’s a FHA-imposed lending limit of $1,149,825 in 2024.Ways to receive payments from a HECM reverse mortgage include:
- Line of credit: To access money this way, you’ll likely need to submit a written request to your loan servicer.
- Term payments: You’ll receive fixed monthly payments for a specified length of time, such as five years. During this time, the amount of cash each month won’t change.
- Tenure payments: You’ll receive fixed monthly payments for as long as you live in the home as your primary residence. The payments will continue even if the loan surpasses the value of the home.
- Modified term/line of credit: This is a type of hybrid payout in which you’ll get both a line of credit and fixed monthly payments for a set time.
- Modified tenure/line of credit: Similar to the above hybrid option, you’ll get a line of credit and fixed monthly payments as long as the home is your primary residence.
- Lump sum: You can request to receive all the available funds in one payment.
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The borrower is not required to pay back a reverse mortgage loan until the home is sold or vacated or until they and a cohabiting spouse dies. However, if the home at some point is no longer the borrower’s primary residence, they will be required to pay back the loan. In addition, the loan may be called in if the borrower fails to pay the property taxes or homeowners insurance, or doesn’t keep the home in good condition.
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