Reverse mortgages appear highly enticing to older homeowners who wish to enhance their retirement income. However, this unusual financial arrangement is only for some, as reverse mortgage eligibility conditions must be completed.
Let’s examine the reverse mortgage requirements.
What Is a Reverse Mortgage?
A reverse mortgage is a loan that lets you borrow against your home’s equity. If you have an existing mortgage, the reverse mortgage loan profits will first be used to pay down your current mortgage, and then you can utilize the leftover funds as you like.
Since the loan proceeds paid off your current mortgage, you no longer need to make a monthly mortgage payment. However, you must continue to pay property taxes, homeowners insurance, and home maintenance expenses. The loan is only payable if you vacate the property, sell it, pass away, or fail to fulfill your loan obligations, which include maintaining the property and paying property taxes and insurance.
The most popular sort of reverse mortgage is a Federal Housing Administration-backed home equity conversion mortgage (HECM) (FHA). We will focus on this loan type while discussing the qualification requirements for reverse mortgages.
Additionally, there are proprietary and single-purpose reverse mortgages.
Reverse Mortgage Rules and Requirements
The U.S. Department of Housing and Urban Development outlines the eligibility conditions for reverse mortgages, which include a minimum age of 62 and property specifications (HUD). Depending on the mandatory financial evaluation results, some homeowners may be required to reserve a part of their reverse mortgage money for continuing property expenses.
Reverse mortgages were designed to assist retirees or those close to retirement. Due to this, the minimum age requirement for a reverse mortgage is 62 years old. You must be 62 or older to qualify for a reverse mortgage.
If you are 62 years old, but your spouse is younger than the minimum for a reverse mortgage, you can still obtain a HECM, but your spouse will be designated a non-borrowing spouse and will not have access to your loan profits. By identifying them as non-borrowing spouses, they will be permitted to remain in the home after your death.
All HECM borrowers are required to attend a counseling session with a HUD-approved third-party counselor. This guarantees that borrowers comprehend reverse mortgage rules, how the loan operates, and any available alternatives.
Borrowers must continue to pay property taxes and homeowner’s insurance, as well as maintain the property, per one of the most critical reverse mortgage laws. If they do not, the debt may mature, and they may lose their home.
HUD also requires borrowers to undertake a financial evaluation to verify they can meet these financial responsibilities. Some borrowers may be obliged to set aside a percentage of their proceeds to cover the loan’s financial obligations based on the financial assessment results. This sum is deposited into a Life Expectancy Set-Aside (LESA), a type of escrow account for the funds.
Home Ownership Eligibility
There are also property-specific reverse mortgage requirements. To obtain a HECM mortgage:
- You must be the owner and occupy the house as your primary residence.
- Typically, you must have at least 50 percent equity in the house.
- You may own the property without a mortgage or have an existing mortgage.
- Single-family houses and properties with up to four units are eligible if the homeowner occupies at least one unit.
- Some condominiums and prefabricated houses may be eligible for a HECM, but they must be HUD-approved and fulfill FHA regulations.
How to Get a Reverse Mortgage
If you are interested in obtaining a reverse mortgage and fulfilling the loan’s conditions, the first step is to shop around for lenders who provide this loan product and compare their interest rates. A financial advisor can also assist you in determining if this is the best lending choice for you.
When you are ready, you will work with your lender to fill out an application for a reverse mortgage and schedule a counseling appointment. Using this HUD search engine, you may locate a counseling agency approved by HUD.
Caution Regarding Reverse Mortgage Scams
Unfortunately, seniors must be wary of the numerous unscrupulous actors operating in the reverse mortgage industry. The Federal Trade Commission (FTC) controls reverse mortgage fraud and cautions customers not to cooperate with anybody who encourages homeowners to “invest” the reverse mortgage income with them.
Inform your counselor, lender, or loan servicer if you suspect fraud while applying for a HECM. Then, submit a complaint with the Federal Trade Commission, your state’s Attorney General’s office, or the state’s financial regulatory body.
The FBI investigates reverse mortgage fraud as well. They appreciate tips on unethical behavior.
The Bottom Line
A HECM may be an excellent retirement financial tool if used appropriately, and you are eligible for one. It can offer seniors much-needed money but is not risk-free; if you’re contemplating one, be sure you fully grasp your rights and duties.