If you’re approaching retirement, your goal is to ensure your long-term financial health while actually enjoying your golden years. But if much of your wealth is bound up in your house, you might feel like you’re “house rich cash poor.” Luckily, anyone in the age bracket of 62 and up is potentially eligible for a reverse mortgage.
Let’s back up for a moment. What is a reverse mortgage program? In short, it’s a way to exchange some of the equity in your home for cash without selling your home. You’ll withdraw funds from your equity each month while adding to the existing mortgage balance or loan balance. The reverse mortgage monthly loan payment will not be due until you sell the home or pass away.
You as the borrower, may be wondering, how much equity do I need for a reverse mortgage? Below, we’ll delve into the requirement for a reverse mortgage and other home equity alternative options for homeowners looking to unlock their home’s equity.
What Percentage of Equity is Required for a Reverse Mortgage?
Although there is no hard and fast number, it’s suggested you have at least 50% equity in your home before taking out a reverse mortgage.
Equity is the amount of money your home is worth presently, minus any loans taken out against your home equity. For example, if your home has an appraised value of $400,000 and you owe $200,000 on your traditional mortgage, you have 50% equity.
These other factors also go into answering the question, how much equity do you need for a reverse mortgage? Keep in mind the following constraints:
- Other liens and mortgages – If you as a prospective reverse mortgage borrower have any other loans against your home—for example, a home equity loan, a HELOC, or a second mortgage—be sure to subtract these from your total home value to get a clear picture of your equity.
- Reverse mortgage fees – Your equity should also cover any fees associated with taking out a reverse mortgage.
- Property taxes – You may need to set aside additional funds for future property taxes to qualify for the reverse mortgage loan.
So can you get a reverse mortgage with bad credit? Thankfully, unlike a traditional mortgage, a reverse mortgage is based primarily on home equity—not on factors like the credit score. However, it’s important to understand the other ways a prospective reverse mortgage lender will evaluate your application.
What Are The Income Requirements For a Reverse Mortgage?
One of the most misunderstood reverse mortgage facts is that there aren’t any income requirements for a reverse mortgage.
Unlike a traditional mortgage, a reverse mortgage doesn’t depend on you making any monthly payment.
However, you will be expected to demonstrate that you are financially able and willing to fulfill all of your loan commitments, such as:
- Property taxes
- Homeowners insurance
- Standard home maintenance and repairs
Proof of your ability could take the form of income or adequate retirement savings.
Can You Be Turned Down For a Reverse Mortgage?
Although reverse mortgages are based primarily on home equity, having 50% equity in your home is not the only criteria for qualification.
Reverse mortgages have strict guidelines that need to be followed. You must meet the following requirements to avoid being turned down:
- Age – You must be at least 62 years old.
- Primary residence – The property you are taking a reverse mortgage out on must be your primary residence.
- Federal debt – You cannot be negligent on any federal loans you’ve taken out.
- Property type – HCEM (Home Equity Conversion Mortgage) requires that your home be one of the following:
- Single-family home
- Owner-occupied property with 2-4 units
- Manufactured home
- Counseling – Before applying for a reverse mortgage, the FHA (Federal Housing Administration) requires you to get counseling services from an approved housing counseling agency.
As mentioned above, you are also obligated to keep up with payments on your property taxes, homeowners insurance, utilities, and standard home maintenance and repairs. If you can’t make an equal monthly payments, you can be disqualified for the reverse mortgage loan.
What Are the Different Types of Reverse Mortgage?
There are usually three types of reverse mortgage options that homeowners can choose from.
Home equity conversion mortgage
This type of mortgage loan is the US Department of Housing and Urban Development or HUD. The HECM loan proceeds can be used for any purpose. However, it is important to remember that a HECM reverse mortgage may be more expensive than other types of loans. Plus, the loan amount can differ according to your:
- Appraised value of your home
- Interest rate
- Financial Assessment
- Reverse mortgage terms
Single purpose reverse mortgage
Also known as property tax deferral, this type of reverse mortgage is usually offered by local and state government agencies or non profit agencies. As the name suggests, the single purpose reverse mortgage can only be used for a specific purpose specified by the lender.
Proprietary Reverse mortgage
This is a type of reverse mortgage offered by specific companies. With a proprietary reverse mortgage loan, the house is used as collateral and allows the homeowner to only pay the loan when they have already moved out. People with a house that has a higher appraised value usually choose this option.
Reverse Mortgage in Retirement Years
Since 62 is the minimum age requirement for taking out a reverse mortgage, older homeowners are often the ones utilizing these loans. Retirees may even own their homes outright after paying off the traditional mortgage or regular mortgage on the home they raised their family in. Younger seniors, however, may be looking at reverse mortgages to cover their existing regular mortgage or to help them pay off debt.
Converting some of your home’s equity into cash is a way to avoid dipping into retirement savings or a nest egg.
Money from a reverse mortgage can be used to pay for:
- Medical bills
- Home improvements
- Everyday expenses
- Payments on high-interest debt
In short, reverse mortgages are used for urgent needs. However, keep in mind that a reverse mortgage may not be a great option for senior homeowners who’d like to leave their home as an inheritance. Likewise, it’s not ideal for those who are hoping to profit from the sale of their home.
Luckily, there are alternatives to a reverse mortgage.
Sale-Leaseback Programs: An Innovative Alternative to a Reverse Mortgage
Now that you’ve learned how much equity is needed for a reverse mortgage, you might be wondering if this is really the best option for you. We have good news: A reverse mortgage isn’t the only way to get cash from your home while staying put. For a more flexible home equity loan alternative, consider a sale-leaseback solution.
A sale-leaseback program can give you options and flexibility. Whether you’re looking for a short-term solution while you shop for your perfect retirement residence or you know you want to stay put for good, age is not a determining factor for sale-leaseback programs.
If you’re interested in learning more about sale-leaseback solutions, reach out to a financial advisor.
If you’re approaching retirement, your goal is to ensure your long-term financial health while actually enjoying your golden years. Let’s delve into the requirement for a reverse mortgage and other home equity alternative options for homeowners looking to unlock their home’s equity. If you are still unsure of alternative options to securing your home equity, after reading this article, consult a financial advisor to discuss your options.
- Federal Trade Commission Consumer Information. Reverse Mortgages.
- LendingTree. Disqualified For A Reverse Mortgage? What To Do.
- U.S. Department of Housing and Urban Development. How the HECM Program Works.
- National Council on Aging. Get the Facts on Reverse Mortgages.