Reverse Mortgage Requirements

A reverse mortgage, specifically a Home Equity Conversion Mortgage (HECM), has certain requirements regarding the amount of equity a homeowner must have in their home. Here are the key equity requirements and considerations:

General Equity Requirements

  1. Sufficient Home Equity: To qualify for a reverse mortgage, homeowners generally need to have significant equity in their home. While there isn’t a fixed percentage of equity required, most lenders look for homeowners to have at least 50% equity. The actual percentage may vary based on the lender and the specific reverse mortgage product.
  2. Age Factor: The amount of equity required is also influenced by the age of the youngest borrower. Older borrowers may be able to access a larger percentage of their home’s equity compared to younger borrowers. This is because the loan amount is calculated based on life expectancy, with older borrowers having a shorter expected duration of the loan.

Specific Equity Considerations for HECM

  1. Principal Limit: The amount you can borrow, known as the principal limit, is determined by the age of the youngest borrower, the current interest rate, and the appraised value of the home (up to a maximum limit set by the FHA, which was $1,089,300 in 2024). Older borrowers with higher equity and lower interest rates can borrow more.
  2. Existing Liens: Any existing mortgage or liens on the property must be paid off using the proceeds from the reverse mortgage. Therefore, homeowners must have enough equity to cover these existing debts.
  3. Property Type: The property must be the borrower’s primary residence, and eligible properties typically include single-family homes, two-to-four unit properties with one unit occupied by the borrower, HUD-approved condominiums, and some manufactured homes.

Other Requirements

  1. Home Maintenance and Obligations: Borrowers must continue to pay property taxes, homeowners insurance, and maintain the home. Failure to meet these obligations can lead to the loan being called due and payable.
  2. Financial Assessment: Lenders conduct a financial assessment to ensure that borrowers have the financial capability to meet their ongoing obligations, such as property taxes and insurance.
  3. Counseling Requirement: Borrowers must undergo counseling from a HUD-approved counseling agency to ensure they understand the implications of the reverse mortgage.

Calculating Borrowable Amount

To determine the amount you can borrow with a reverse mortgage, consider the following factors:

  • Appraised Home Value: The current market value of the home as determined by an appraisal.
  • Loan Principal Limit Factor: Based on the youngest borrower’s age and current interest rates.
  • Existing Mortgage Balance: Any outstanding mortgage balance or liens that need to be paid off.
  • Reverse Mortgage Costs: Fees, closing costs, and mortgage insurance premiums that are typically financed into the loan.

Example

If you are 72 years old with a home valued at $400,000 and have an existing mortgage balance of $50,000, you might be able to borrow around 50-60% of the home’s value, minus the $50,000 to pay off the existing mortgage, and any associated fees.

Conclusion

Reverse mortgage equity requirements ensure that borrowers have substantial equity to support the loan and maintain financial stability. Each situation is unique, so it’s important to consult with a reverse mortgage lender or financial advisor to understand how these requirements apply to your specific circumstances.