When You Can’t Get a Reverse Mortgage
A reverse mortgage creates an additional stream of income in retirement for eligible homeowners by allowing them to tap into their home equity. However, they aren’t for everyone, and not everyone qualifies for one. Before applying, it’s important to understand what could make you ineligible for this type of funding.
- A reverse mortgage allows homeowners to draw income from their home equity, with no repayment due as long as they’re using the home as a principal residence.
- Reverse mortgages that are subject to Federal Housing Administration (FHA) guidelines are called home equity conversion mortgages (HECMs).
- Certain property types may be excluded from reverse mortgage eligibility.
- Homeowners who can’t get a reverse mortgage may still qualify for a home equity loan or home equity line of credit (HELOC).
What Is a Reverse Mortgage and How Does It Work?
A reverse mortgage is a financial arrangement in which a reverse mortgage company makes payments to a homeowner against the equity in their home. This money is typically tax free and can be received as a lump sum or in monthly installment payments. The homeowner can use money from a reverse mortgage to pay for expenses in retirement.
The homeowner pays nothing back to the reverse mortgage company as long as they’re using the home as a principal residence. If the homeowner sells the home, moves into an assisted living facility or a nursing home, dies, or stops using the home as their main residence for any other reason, the reverse mortgage balance is payable immediately. This balance can include the original amount of equity paid out, plus interest and fees.
Who Is Eligible for a Reverse Mortgage?
Eligibility for a reverse mortgage can depend on what type of reverse mortgage you’re interested in getting. For example, some state and local government agencies, as well as certain nonprofit organizations, offer reverse mortgages, but if you’re looking for a federally insured option, then you need a home equity conversion mortgage (HECM). These reverse mortgage products are backed by the U.S. Department of Housing and Urban Development (HUD).
So who qualifies for a HECM? Generally, to be eligible homeowners must:
- Be age 62 or older
- Own their home outright or have paid down the majority of their mortgage balance
- Not be delinquent on any federal debts
- Have financial resources to cover the ongoing costs of homeowners insurance, property taxes, maintenance, and repairs
- Attend HUD-approved consumer counseling
You must also own and reside in an eligible property. Under HUD guidelines, eligible properties include:
- Single-family homes
- Two-, three-, and four-unit homes with one unit occupied by the borrower
- HUD-approved condominium projects
- Individual condominium units that meet Federal Housing Administration (FHA) approval requirements
- Manufactured homes that meet FHA requirements
Requirements for eligible properties may be different if you’re getting a reverse mortgage through a program that is not affiliated with HUD. There are unscrupulous lenders out there, so be extra careful if you are getting an unaffiliated one.
In addition to your financial resources, your potential future income and credit history may also be considered as part of the reverse mortgage application process.
Who Is Not Eligible for a Reverse Mortgage?
Generally, you would not be eligible for a HECM if you don’t meet the basic requirements established by HUD. For example, if you still owe a large amount on your mortgage or you and your spouse are both under 60, you wouldn’t be able to get one just yet.
Your home itself could also present an obstacle to getting a HECM. Condos and mobile homes are eligible, but only if they meet FHA and HUD standards. If you live in a mobile home that was constructed prior to the enforcement of the Manufactured Home Construction and Safety Standards in June 1976, you would not be able to get a reverse mortgage on it.
With single-unit condos, to be eligible for single-unit approval, the unit must be:
- Located in a project that is “not FHA-approved”
- Complete and ready for occupancy
- Equipped with at least five dwelling units
- Not a manufactured home
These rules are complicated, so check carefully before assuming your condo qualifies. Again, any eligible property must be a home that you live in as a principal residence. Investment properties or second homes, such as a vacation home, would not be eligible for a reverse mortgage.
HUD offers an online search tool you can use to look for FHA-approved condos.
Reverse Mortgage Alternatives
If you’re not eligible for a reverse mortgage, there may be other options for monetizing your home equity. The possibilities include a:
- Home equity loan
- Home equity line of credit (HELOC)
- Cash-out refinance
A home equity loan allows you to withdraw equity in a lump sum. This is a type of second mortgage, as the home serves as collateral for the loan. You repay the money to the lender with interest, typically at a fixed rate. Home equity loans may have terms ranging from five to 30 years.
A home equity line of credit (HELOC) can be drawn against as needed. Your credit line represents a portion of your home equity, and you only pay interest on what you withdraw. HELOCs may have an initial period during which no payment is required, followed by a repayment term (often 10 years). HELOCs usually have variable interest rates.
A cash-out refinance involves taking out a new mortgage larger than your current mortgage to (1) pay off the current mortgage and (2) withdraw cash at the closing. A cash-out refi is something you might consider if you want to withdraw cash from equity. If interest rates are lower, you could even get a lower interest rate or monthly payment for your mortgage.
Is It Hard to Get Approved for a Reverse Mortgage?
Getting approved for a reverse mortgage typically hinges on your equity stake in the home, age, and financial resources. You may not be approved if you have limited resources or your home doesn’t meet eligibility requirements.
What Disqualifies You From Getting a Reverse Mortgage?
Some of the things that can prevent you from getting a reverse mortgage include not using the home as your principal residence, not having sufficient equity in the home, and lacking the financial resources to pay the ongoing costs of homeowners insurance, property taxes, maintenance, and upkeep. Other disqualifications include being delinquent on federal debt or living in an ineligible property.
When Do You Pay Back a Reverse Mortgage?
Generally, no payment is due on a reverse mortgage balance as long as the borrower continues to use the home as their principal residence. If they sell the home, move out, or die, the balance becomes payable in full.
The Bottom Line
Reverse mortgages can help to create a more secure retirement by providing supplemental income. Getting a reverse mortgage isn’t always a simple process, however, as homeowners need to be sure they can meet the different requirements for approval. If you’re considering a reverse mortgage, take the time to shop around for the best reverse mortgage companies to find the right option for your situation.