A reverse mortgage can be a good way to access the equity in your home, but you’ll need to meet some requirements to do it. The main ones are your age, the amount of equity you have in your home (and its value), and your ability to cover home-related expenses. As you’re shopping for a reverse mortgage, look for a lender that offers attractive interest rates, charges reasonable fees, and enjoys a good reputation.
Understanding Reverse Mortgages
What Is a Reverse Mortgage?
A reverse mortgage enables a homeowner who’s 62 or older to tap into their home equity in order to borrow money. The loan is paid back after the borrower stops living in the home.
Types of Reverse Mortgages
There are three types of reverse mortgages:
- Federally insured home equity conversion loan (HECM), the most common type
- Proprietary reverse mortgage from a private lender
- Single-purpose reverse mortgage from a state or local government agency or a non-profit organization
How to Get a Reverse Mortgage
Steps involved in getting a reverse mortgage include determining your eligibility, choosing a lender, and completing an application and counseling. The steps outlined below apply to the most common type of reverse mortgage, a federally insured HECM.
- Check age and homeownership requirements: An HECM borrower must be at least 62 years old and use the home as their primary residence. (For some proprietary loans that are not backed by the government, the minimum age is 55.) The property can be a single-family home, a two- to four-unit residential property (with one unit occupied by the borrower), or an approved condo, townhouse, or manufactured home.
- Review credit and income requirements: Although no minimum credit score is required, you will undergo a credit check to see whether you have any federal tax liens or past-due federal debts. A lender also will review your monthly living expenses and your assets. This helps a lender figure out whether you’ll have enough money to cover homeowners insurance, property taxes, and other costs.
- Evaluate the home’s value and equity: To qualify for a HECM loan, a borrower must own their home outright or must have paid off a big chunk of their traditional mortgage. In addition, their home equity typically must be at least 50%.
If you go with a proprietary reverse mortgage or a single-purpose reverse mortgage instead of an HECM loan, keep in mind that neither of these alternatives is federally insured. Also, lending requirements for proprietary reverse mortgages and single-purpose reverse mortgages aren’t the same as they are for HECM loans. For example, proprietary loans may allow for younger borrowers and higher maximum home values.
Choose a Lender
- Research lenders: When you’re shopping for a reverse mortgage lender, be sure to examine its reputation. Check consumer reviews at the Better Business Bureau, Trustpilot, and Yelp. Look for lenders with positive comments about customer service.
- Compare offers: Be sure to compare interest rates charged by lenders. Which lenders offer the best deals for a reverse mortgage that would fit your needs?
- Review lender requirements: Generally, lenders follow requirements for HECM loans that are set by the federal government. However, a lender might have some leeway, such as dictating whether home repairs must be made before they’ll approve your loan application.
- Review lender qualifications: Before selecting an HECM lender, check out its qualifications. Has it been approved by the Federal Housing Administration (FHA) and U.S. Department of Housing and Urban Development (HUD)? These federal agencies oversee the HECM program. Is the lender a member of the National Reverse Mortgage Lenders Association, which requires members to follow a code of ethics?
- Check fees and costs associated with a reverse mortgage: Aside from considering a lender’s interest rates, it’s a good idea to look at fees and other costs associated with your reverse mortgage. Some fees and mortgage insurance costs are set by the government, but pay attention to closing costs, which will vary by lender.
- Select a lender and initiate the application process. Once you’ve settled on a reverse mortgage lender, it’s time to fill out an application and participate in mandatory counseling.
Complete Application and Counseling
- Gather required documentation: Documentation needed to fill out an HECM application includes a Social Security or Medicare card, an ID proving your age, a driver’s license or other proof of your address, proof of income such as bank statements, and a certificate showing completion of mandatory counseling.
- Attend a mandatory counseling session: Before submitting an application, you must complete a counseling session provided by a HUD-approved agency. The agency charges a fee for this counseling, which can be done in person or over the phone.
- Submit the application and required documentation. With the mandatory counseling out of the way and required documentation in hand, you’re now ready to submit your application.
Compare the Best Reverse Mortgage Lenders
|Reverse Mortgage Company||Minimum Age||Upfront Costs||NRMLA Member|
|American Advisors Group (AAG)||62||$6,000–$8,000||Yes|
|Liberty Reverse Mortgage||62||$5,000–$19,000||Yes|
|Finance of America Reverse||55||Varies by product||Yes|
Guide to Choosing a Reverse Mortgage
When choosing a reverse mortgage, you should take several things into consideration, such as the current value of your home, the type of reverse mortgage you want, and the alternatives to a reverse mortgage.
Factors to Consider When Getting a Reverse Mortgage
Among the factors to consider when getting a reverse mortgage are:
- Current value of your home: The amount of home equity you hold plays a big part in how much money you can borrow through a reverse mortgage. Home equity is calculated by subtracting how much you still owe on the regular mortgage from how much your home is worth (the current value). Therefore, the current value of your home is a critical piece of this funding puzzle.
- Interest rates: Just as it’s important to explore interest rates for a traditional mortgage, It’s important to explore interest rates for a reverse mortgage. One major reason: A lender adds interest charges each month to the balance of a reverse mortgage, yet the borrower isn’t making monthly payments. Therefore, years’ worth of interest charges pile up until the loan is due. The interest rate for a reverse mortgage may be fixed or variable. Generally, the interest rate for a reverse mortgage is higher than the interest rate for other home loans.
- Borrower’s age: To qualify for a HECM loan, a borrower must be at least 62 years old when the loan closes. The older you are, the more money you’re able to borrow as a percentage of your home’s value.
- Type of reverse mortgage: Three types of reverse mortgage are available. A federally insured HECM is the most common type of reverse mortgage. The two other options are a proprietary reverse mortgage from a private lender or a single-purpose reverse mortgage from a state government agency, local government agency, or nonprofit organization. A single-purpose loan is designed to cover a lender-approved expense like a home repair project or a property tax bill. Neither of these options is federally insured.
- Closing costs for the reverse mortgage: Closing costs include fees for the home appraisal, title search, and credit check. These costs are on top of the loan origination fee, which cannot exceed $6,000 for an HECM loan.
Reverse mortgages typically cost more than other home loans do. That’s primarily because a lender adds interest charges and fees to the loan balance each month, while the borrower isn’t required to make monthly payments. Once a reverse mortgage comes due, such as when the borrower dies, years’ worth of interest and fees could have accumulated.
Alternatives to Reverse Mortgages
Homeowners can use several borrowing alternatives to reverse mortgages, including:
- Home equity line of credit (HELOC): Much like a credit card, a HELOC gives you a line of credit that you can draw on over a certain period of time. The amount you can borrow is tied to the amount of home equity you have.
- Home equity loan: With a home equity loan, you borrow a lump sum of money based on the amount of home equity you have.
- Cash-out refinance: A cash-out refinance loan lets you take out a new mortgage that replaces your existing mortgage. The new mortgage exceeds your current loan balance, and you keep the difference in cash.
What Happens to the Home After the Borrower Passes Away?
A reverse mortgage becomes due when the borrower—or any co-borrowers or an eligible non-borrowing spouse dies—pass away. To keep the home, the heirs would need to pay the entire balance that’s due. To sell the house, the heirs would need to cover the entire loan balance, or at least 95% of the home’s appraised value if the loan balance exceeds the home’s value.
Can You Lose Your Home With a Reverse Mortgage?
When you take out a reverse mortgage, you still own the home. However, you could lose your home to foreclosure if you fail to keep up with homeowners insurance premiums, property taxes, or lender-required repairs. The same holds true if you no longer use the home as your primary residence.
How Much Money Can You Get With a Reverse Mortgage?
How much money you can get with a reverse mortgage is based on three factors: your age, the value of your home, and the interest rate for the loan.
Typically, an older borrower, the owner of a high-value home, or a borrower who snags a lower interest rate can get more money. The money can come in the form of a monthly payout, a lump-sum payout, or a line of credit.
What If You Want to Cancel Your Reverse Mortgage?
A borrower can cancel a reverse mortgage within three days of the loan closing without paying any financial penalties. This is known as “the right of rescission.” You also can get out of a reverse mortgage by selling the house, paying off the entire loan balance with your own money, refinancing the loan, or converting the reverse mortgage into a traditional mortgage.