Eligibility Requirements for a Reverse Mortgage
A reverse mortgage allows senior citizen homeowners to tap their home’s equity. This option may appeal if you need to supplement your retirement income. Unlike a traditional mortgage, there is no monthly payment, and the loan isn’t repaid until you pass away or sell your home. However, you must continue to pay homeowner’s insurance and property tax.
A downside is that interest still accrues on the loan, and the upfront costs could be steep. In addition, taking out a reverse mortgage can make it more difficult to pass down property to your heirs.
We’ll walk you through the typical requirements to qualify for a reverse mortgage, including age, residency, and other qualifications. Plus, we’ll take a look at a few alternatives.
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Reverse mortgage requirements
There are three types of reverse mortgages:
- Home equity conversion mortgages (HECMs): HECMs are insured by the Federal Housing Authority (FHA). The maximum HECM payout for 2024 is $1,149,825.
- Private reverse mortgages: Some lenders offer private reverse mortgages that the federal government doesn’t insure. Private reverse mortgages aren’t subject to the same loan limits as HECMs.
- Single-purpose reverse mortgages: Some states and non-profits offer single-purpose reverse mortgages for certain purposes, like home repairs.
The requirements for the different types of reverse mortgages are similar, with the exception that some lenders may have unique requirements for private reverse mortgages.
| Criterion | Typical requirement |
| Age | 62 to qualify for HECM (varies for private reverse mortgages) |
| Equity | At least 50% equity in your home |
| Residence type | Primary |
| Debt | No delinquent federal debt |
| Minimum credit score | None for a HECM (varies for private reverse mortgages) |
| Counseling | Necessary for HECM (varies for private reverse mortgages) |
| Financial reserves | Must continue paying ongoing homeownership expenses, like property taxes and home insurance |
Age
You must be at least 62 years old to qualify for a HECM. However, some lenders will allow applicants as young as 55 to qualify for a private reverse mortgage. In addition, some states, like New York, require private reverse mortgage borrowers to be at least 60.
Equity
In general, you need at least 50% equity in your home to qualify for a HECM or reverse mortgage. For example, if your home’s current appraised value is $500,000, your mortgage has to be $250,000 or lower.
Residency
You must occupy the home you’re taking out a reverse mortgage on for most of the calendar year.
Debt
To qualify for a HECM, you must not have any delinquent federal debt, such as a federal student loan or tax bill. That said, you could use the money from a HECM to pay off any overdue federal debts.
Minimum credit score
HUD doesn’t specify a minimum credit score requirement to qualify for a HECM. However, when you apply for the program, a lender reviews your credit history. Lenders that offer private reverse mortgages might have their credit score requirements.
Counseling
When you apply for a HECM, you must participate in a HUD-approved counseling course.
Whether you have to complete a counseling course for a private reverse mortgage depends on where you live. For example, New York requires residents to receive in-person counseling unless you have a written waiver.
Financial reserves
Whether you take out a private reverse mortgage or HECM, you must have enough money to continue paying ongoing housing-related costs such as property taxes and home insurance.
Ask the expert
In my experience, a reverse mortgage is a last resort for somebody who desires to remain in their home for life and whose income and assets are not sufficient for the remainder of their life; the option to leave the home as a legacy may not be an option anymore if it was in the original estate plan—and that is okay! Taking care of yourself is the priority.
Who sets reverse mortgage eligibility requirements?
The U.S. Department of Housing establishes the eligibility requirements for HECMs. The FHA makes any adjustments to the maximum HECM payout each year based on national average home prices.
For private and single-purpose reverse mortgages, requirements may change based on state laws. Lenders sometimes change eligibility requirements for private reverse mortgages and other products based on business needs or economic changes.
What are the financial implications of a reverse mortgage?
Like a traditional mortgage, you’ll need to pay upfront fees, like closing costs and origination fees, for a reverse mortgage.
In addition, if you get a HECM, you’ll have to pay an upfront mortgage insurance premium of 2% of the loan and 0.5% per year. You can pay the upfront mortgage insurance fee out of pocket or roll it into your loan.
Taking out a reverse mortgage can also affect your ability to pass down your home to heirs. If you pass away, your heirs might have to repay the loan in full or at least 95% of the property’s current value.
Ask the expert
A financial professional can help provide the individual/s with objective advice, education, and the considerations that accompany obtaining a reverse mortgage. This is most impactful for those choosing a HECM or private reverse mortgage. For those looking at doing a specified purpose reverse mortgage, I suggest looking at other funding methods, such as a HELOC or HEL, before deciding on the reverse mortgage and discussing this with a financial professional/counselor. However, I think it is an option to tap into the home’s equity without selling it.
Alternatives to a reverse mortgage
When securing your financial situation in retirement, a reverse mortgage isn’t the only option. Several alternative financial products can serve as useful substitutes, each with its unique pros and cons. Consider these alternatives before making a final decision.
Home equity loan
Unlike a reverse mortgage, which allows you to convert the equity in your home into a loan, a home equity loan is more of a traditional loan issued based on the value of your home.
Benefits of home equity loans include fixed interest rates and predictable payments, which might be more comfortable for some homeowners. But failure to meet the required payments can leave you at risk of losing your home, unlike a reverse mortgage, where there are typically no monthly repayments.
Home equity line of credit (HELOC)
Like a home equity loan, a HELOC lets you borrow against the equity in your home, but in a different way. With a HELOC, you can borrow as much or as little as you need within a credit limit.
This makes it a flexible alternative to the reverse mortgage. However, HELOCs come with variable interest rates, which means monthly payments can fluctuate. Moreover, defaulting on payments could lead to foreclosure.
Downsize
Another option is to sell your home and downsize. This can provide you with a substantial amount of cash, which can be significant depending on the property’s value. However, moving home, particularly in later life, can be challenging. Nevertheless, it’s a straightforward alternative to the reverse mortgage, and it doesn’t involve borrowing.
Cash-out refinance
A cash-out refinance allows you to take out a new mortgage for more than you owed on your original loan, pocketing the difference in cash. This could be a beneficial option if your house’s value has risen since you bought it. However, this choice presents higher interest costs over time and longer loan payoff periods than a reverse mortgage.
Home equity sharing agreement
With a home equity sharing agreement, a company invests a specific amount in your property in exchange for a stake in the future value appreciation of your property. This option can be a solid alternative to a reverse mortgage because it doesn’t involve monthly payments.
However, it also means selling a portion of your property’s future value, which could affect whether and how you pass on your property to your heirs.
Ask the expert
An additional alternative is sharing the home with a trusted friend or family member and sharing the living expenses (mortgage, insurance, property taxes, utilities, etc.). Of course, this comes with some complications such as who “owns” the house, however, if both parties are in agreement and if it is possible based on the state they live in and the type of loan they have, they could establish a Joint Tenant in Entirety ownership of the house. This could lead to other tricky family or friend dynamics, but it could work for some (i.e., sisters, brothers, and best friends). Consulting with a financial professional or counselor is recommended to aid in weighing the pros and cons of their options.
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