The following is presented for informational purposes.
A reverse mortgage is a lending product that allows borrowers aged 62 and older to borrow against the equity in their home without having to make payments until the borrower and any non-borrowing spouse has left the house. It’s a useful tool for homeowners with insufficient retirement savings looking to supplement their golden years and stay in their house in the process.
But exactly how much equity do you have to have in your home in order to qualify for a reverse mortgage? How does a reverse mortgage stack up against your other loan options? Here’s what you need to know.
Reverse mortgage basics
A reverse mortgage is a loan where your home serves as collateral. There are actually a variety of loan options that can be considered a “reverse mortgage”. The most popular is the Home Equity Conversion Mortgage, or HECM, which is insured by the U.S. Department of Housing and Urban Development (HUD). For the sake of simplicity, we’ll be focusing on HECMs.
There are a number of unique features that separate reverse mortgages from other loans.
A HECM borrow must be at least 62 years old in order to qualify. There is no age requirement for a non-borrowing spouse.
No Repayment Until the Borrower and Their Spouse Have Vacated the House
Perhaps the most appealing feature of a reverse mortgage is that the loan doesn’t have to be repaid until both the borrower and their non-borrower spouse have passed away, sold the property, or moved out of the home. The loan becomes due immediately once these conditions are met and is usually repaid with the proceeds from the sale of the home.
The Non-Borrowing Spouse Can Stay in the House after the Borrower Passes Away
If the borrower should pass away, their non-borrowing spouse can remain in the house until they pass away themselves or they vacate the house for another reason. Not until both the borrower and their non-borrowing spouse have left the house does the loan need to be repaid.
You Continue to Be Responsible for Taxes and Other Costs
Although you won’t be required to repay the loan until the borrower has vacated the property, you’ll still be responsible for property taxes, insurance, and general upkeep.
There Cannot Be Any Other Liens on the Property
Any other mortgages or liens must be repaid as part of the reverse mortgage.
How much equity do you need to qualify for a reverse mortgage?
In a typical mortgage, the loan amount is largely determined by the home’s market value, as the lender doesn’t want to lend more than what the house is worth. In a reverse mortgage, the loan amount is determine more by the owner’s equity in their home than the overall value of the home.
Which raises the question – exactly how much equity do you need?
“There isn’t a specific number when it comes to how much equity you need,” explains Cara Pierce, a housing counselor and reverse mortgage specialist at MMI. “There needs to be enough equity to pay off any current liens and mortgages, plus all the fees and costs associated with taking out the reverse mortgage. Some lenders may also require that your future property taxes are set aside as part of the loan, which can also make a difference.”
Even if you own your house outright, you still won’t be able to borrow the full value of the home. “Because the reverse mortgage works in ‘reverse’ of a regular loan, the equity is going down over time, instead of up,” explains Pierce. “If the lender created a loan for the full value of the home, the homeowner would owe more than the property was worth one month after taking out the reverse mortgage.”
To reduce the risk on their investment, lenders also factor in the age of the borrower and any non-borrowing spouse when deciding on the loan amount.
When should you choose a reverse mortgage?
A reverse mortgage can be a great product in the right circumstances, but it can also be costly.
“If the borrower needs a small amount of money and has the ability to make payments on a loan, then I would suggest doing a home equity line of credit (HELOC), a second mortgage, or a refinance of the current loan,” says Pierce. “These options will usually be less expensive.
“However, if the homeowner needs to borrow a large amount and doesn’t have the income to afford the monthly payment on a home loan, or if the purpose of the loan is to increase the amount of income, then I might recommend considering a reverse mortgage. As long as the borrower keeps up with their responsibilities, they should be in no danger of losing the home.”
There’s a lot to consider with a reverse mortgage. If you’re pursuing a HECM, make an appointment to connect with a trained reverse mortgage counselor to discuss your options and prepare yourself for the responsibilities associated with this unique loan product.