When President Ronald Regan signed into law the FHA-Insured Home Equity Conversion Mortgage (HECM), the intent was to give retirees the ability to easily tap into stored equity in their homes.
The law came with specific restrictions to qualify for this loan. The most basic reverse mortgage requirement is that the youngest applicant must be 62 or older.
Next, an applicant must meet with an approved counselor who explains the details, costs, and obligations of the loans.
Additionally, the home must be the primary resident of the borrower and the applicant must meet HUD-defined financial eligibility.
The financial criteria have two components:
Residual Income: The household residual income must exceed the average monthly expenses.
Satisfactory Credit: All installment debt obligations must have been paid timely over the past 12 months. There can be no more than two 30-day late mortgage payments in the past 24 months. Finally, there can be no derogatory credit on revolving accounts over the past year.
Property Type Reverse Mortgage Requirements
Additionally, the property must have sufficient equity.
Although there is no firm rule in place in terms of the maximum loan to home value, in general, you will need to have at least 50% – 60% of equity available to qualify.
The home itself must also meet FHA lending standards. Those qualifications are listed below:
- Single-family home
- Multi-unit property with up to four units
- Manufactured home built after June 1976
- Condominium, or a townhouse
- The property must meet flood requirements (not in a flood zone)
- The property claim amount cannot exceed $726,525 for 2019.
The Types of Reverse Mortgages
There are three types of reverse mortgages.
The most common is the federally insured loans known as Home Equity Conversion Mortgages (HECMs).
These loans are backed by the HUD (Housing and Urban Development) insurance fund. This is the leader in terms of loan origination volume and is what most people refer to as reverse mortgages.
These loans come with specific underwriting standards and requirements.
Next, are the Single Purpose reverse mortgages.
These are loans where the lender specifies exactly what that proceeds from the loan must be used for.
Often, this is directed at costs that are aligned with the servicer’s interests. Examples include property taxes, home insurance, house maintenance, etc.
Given that the purpose of the equity withdraw is aligned with there servicer’s interest often the terms or qualifications for these loans are more flexible.
Finally, there is a large umbrella of offerings referred to as Private Loans.
Private loans, as the name implies, are offered by private entities.
These products are engineered to fill the gaps left by the HECM restrictions. Loan values can go up to $4M dollars, loan to value thresholds are relaxed, and credit history requirements are more flexible.
Minimum/maximum age, why is it set at 62?
This loan program was designated to help retirees on fixed income.
The age limit was set at 62 based on the retiring demographics at the time the regulations were set in 1988.
The regulations still require that the youngest person on the mortgage be at least 62 years old. Five years ago there was an adjustment made for a surviving spouse.
If they were not on the mortgage, and at the time of spouse’s death, they were less than 62 old regulations hard the mortgage becoming immediately due.
HUD Mortgagee Letter in 2014 eliminated this potential hardship and now will allow the surviving spouse to assume the reverse mortgage.
Another reason the age limits were set at 62 was to prevent bad financial practices and to help protect the HUD fund.
The age limit definitely limites the eligible households. Property owners, over 62, with at least a 50% equity stake in their house.
The HUD insurance fund wants to take calculated risks and set high equity thresholds and age limits to help limit risk exposure.
What is the Average Age and Age Requirement?
Again, the age requirement is straight-forward and inflexible.
To qualify for a HECM loan the youngest applicant must be 62.
In a survey completed in 2015 the average age of a reverse borrower was 70.
This is down from the census survey result of 2000 that reported 77 as the average, and later a 2009 survey that calculated the average at 72.
As the program continues to increase in popularity and become more mainstay, the average continues to drop.
I would expect that to continue and eventually stabilize at the age of 67 given most age distribution charts.
This trend will be partially off-set by longer life-expectancies but I that will not have a material effect for another 15-20 years from now.
What is the Average Equity Level and Equity Requirements?
In terms of calculating the maximum that you can qualify on a reverse you need to consider a few different ceilings.
First, you are capped by regulation at taking out no more than $726,525.
This is based on a calculation by HUD that establishes that limit of 150% more than the underwriting limits of Fannie Mae and Freddie Mac.
Next, most programs will limit the loan to home value ratio at 80%.
And most of the time that is capped at 55-60% based on risk and property circumstances.
The other qualifying limiter is if you have an existing first mortgage the proceeds from this transaction must fully pay that loan off.
There will also be fees associated with this loan (origination, underwriting, closing costs, etc.) that can range up to 5% of loan value.
Both of these pay-off amounts must be considered when determine total loan value, and the resulting Equity Requirements.
Does Permanent Disability Affect Age Eligibility for a Reverse Mortgage?
No. The age limit is 62 and disability status is not considered.
Can a homeowner that has a mortgage still get a reverse mortgage loan?
Yes you can!
You will need to take the proceeds from this loan and fully pay-off an existing first mortgage.
That will be a requirement to close the loan.
What if There is Not Enough Home Equity to qualify?
This is referred to as a “shortfall”.
Your option here is to either use available funds to pay down the existing mortgage, or to continue to make payments against your mortgage over time and reapply with the balance is low enough to qualify.