How much equity do I need for a reverse mortgage?
A common misconception of reverse mortgages is that you cannot obtain one unless you own 100 percent of your house.
What is true is that you cannot maintain a conventional mortgage and a reverse mortgage simultaneously. But having principal remaining on your conventional mortgage will not prevent you from applying for a reverse mortgage.
What will happen is that you will be required to use some of the reverse mortgage proceeds to pay the remaining balance on the conventional mortgage. Many seniors do this as a way of eliminating a large monthly payment, which helps their retirement income stretch further.
There are also no eligibility requirements related to equity, other than it will need to be less than the available principal limit, which is the total amount of principal you can obtain from a reverse mortgage.
A reverse mortgage principal limit is based on three factors at the time you apply for the loan: your age, the total equity of your home (its appraised value minus any mortgages or liens on the property), and market interest rates.
The younger you are, the more equity you should have because older borrowers are given a higher principal limit. That’s because, like annuity and Social Security payments, reverse mortgage principal limits are based on life expectancy. Therefore, the older you are, the more you are allowed to borrow.
For example, if you’re 65 years old and have a house with an appraised value of $300,000, you can obtain a reverse mortgage if you still owe $140,000 on the original mortgage. Be advised, however, that after paying off the original mortgage, plus fees and other costs, you will only have about $7,500 left to borrow.
If you’re 62, on the other hand, with a $300,000 house, the $140,000 mortgage balance would essentially use up your entire principal limit.
A 72-year-old, however, could still owe half of the appraised value of his or her $300,000 home and still qualify for a reverse mortgage.
Reduce your monthly debt vs. increase monthly income
The best way to answer the question of how much equity is needed is to determine what you need the money for and how you ultimately plan to use the proceeds from the reverse mortgage.
If your main objective is to use the loan to completely pay your conventional mortgage, thus eliminating a monthly expense from your budget, then you don’t need as much equity to meet your goals.
In essence, what you are doing under this strategy is increasing the amount of money you owe on your home, but deferring the repayment of that debt until you pass away or move out of the property. Your overall mortgage debt increases, but you have more income available to spend on items other than housing.
For example, in one scenario a 65-year-old homeowner’s property is currently valued at $400,000, and he or she owes $75,000 on the mortgage. If the borrower just used the reverse mortgage proceeds to pay off the original mortgage, after ten years the reverse mortgage balance, including fees and interests, would be around $135,000.
If on the other hand, you want to establish a line of credit or receive monthly income from the reverse mortgage, then you will want to have as much equity available as possible.
For example, take the 65-year-old with the $300,000 home. If he or she owes nothing on the property, then the principal limit available after fees and costs are paid is more than $153,000. This can produce a line of credit that can grow monthly or annually and be accessed at any time. It could also provide a single lump sum payment of up to $88,000, or lifetime income of more than $800 a month.
But if the same homeowner still owes 25 percent ($75,000) of the appraised value at the time of the reverse mortgage, the line of credit available falls to under $79,000, the lump sum cash payment drops to $13,000 and the lifetime monthly payment becomes just $400.
If you still have a significant amount on your original mortgage, and you’re looking for a line of credit or a lump sum, a better option may be a regular home equity loan or a home equity line of credit.
What are the equity requirements to qualify for a reverse mortgage loan in 2016?
First, do you know what a home’s equity is? To calculate how much equity you have available you need to know two things:
- Value or estimated value of the property
- Sum of existing mortgage loans and liens
The math is very simple once you know the above. Simply subtract #1 from #2. Example, if your property is worth $200K and you owe $50K/mortgage, you have $150K in equity.
How much equity do I need to qualify for a reverse mortgage? A rule of thumb is right around 50%+ in home equity.
With the above example, the homeowner cannot owe more than $100k (and this is pushing it). To get more technical, we have to look at the principal limit factors.IF
IF you have no idea what your home’s value is we can quickly determine this for you, feel free to give us a call. We have online tools not available to consumers as well as popular websites to pull this data from. It is important to look at considerable comps in your area (properties that have recently sold nearby that are similar to your’s). We will do this for you at no cost at all to help you determine if you have sufficient equity.
Also, let’s look at all the requirements to qualify for a reverse mortgage as you may have enough equity but may not qualify for another reason.
HECM Qualifications/General Requirements to Qualify for HECM Loan:
– You must be at least 62 years or older.
– You must own your home.
– Your home must be your primary residence (live there for six months +).
– You must complete a counseling session with an HUD-approved counseling agency.
– Your home must be a single-family home or a 1-4 multi-unit home with one unit occupied by you.
– Your home can be a manufactured home if it meets FHA/HUD guidelines.
– Your home can be a condominium if it is FHA/HUD-approved.
– You are responsible for and must be financially able to pay your property taxes, insurance, and home maintenance and any applicable HOA fees.
– You cannot be delinquent on any federal debt.