When You Can’t Get a Reverse Mortgage
A reverse mortgage creates an additional retirement income stream for eligible homeowners by allowing them to tap into the equity in their home. However, they are not for everyone, and not everyone qualifies for one. Before applying, it is important to understand what might make you ineligible for this type of funding.
- A reverse mortgage allows homeowners to draw income from the equity in their home, with no repayments as long as they use the home as their primary residence.
- Reverse mortgages subject to Federal Housing Administration (FHA) guidelines are called home equity conversion mortgages (HECM).
- Certain types of properties may be excluded from reverse mortgage eligibility.
- Homeowners who cannot 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 out of the equity in their home. This money is usually tax-free and can be received as a lump sum or in monthly installments. The homeowner can use the money from a reverse mortgage to pay for retirement expenses.
The homeowner pays nothing back to the reverse mortgage company as long as they use the house as their primary residence. If the homeowner sells the home, moves into an assisted living facility or retirement home, dies, or ceases to use the home as a principal residence for any other reason, the reverse mortgage balance is payable immediately. This balance may include the initial amount of equity paid in, plus interest and fees.
Who is eligible for a reverse mortgage?
Eligibility for a reverse mortgage may depend on the type of reverse mortgage you are interested in. For example, some state and local government agencies, as well as some nonprofits, offer reverse mortgages, but if you’re looking for a federally insured option, you need a home equity conversion mortgage. (HECM). These reverse mortgage products are backed by the US Department of Housing and Urban Development (HUD).
So who qualifies for a HECM? Generally, to be eligible, owners must:
- Be 62 or older
- Own your home or have paid off most of your mortgage balance
- Not be overdue on federal debts
- Have financial resources to cover the ongoing costs of home insurance, property taxes, maintenance and repairs
- Attend HUD-approved consumer advice
You must also own and reside in qualifying property. According to HUD guidelines, eligible properties include:
- Single-family homes
- Two-, three- and four-unit houses with one unit occupied by the borrower
- HUD Approved Condominium Projects
- Individual condominium units that meet Federal Housing Administration (FHA) approval requirements
- Manufactured Homes Meet FHA Requirements
Requirements for qualifying properties may be different if you obtain a reverse mortgage through a program that is not affiliated with HUD. There are some unscrupulous lenders out there, so be very careful if you get 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 qualify for a HECM if you do not meet the basic requirements set forth by HUD. For example, if you still owe a large amount on your mortgage, or if you and your spouse are both under 60, you won’t be able to get one just yet.
Your home itself could also present a barrier 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 built before the Construction and Safety Standards for Manufactured Homes came into effect in June 1976, you will not be able to get a reverse mortgage on it.
In the case of single family condos, to be eligible for single unit approval, the unit must be:
- Located in a “non-FHA approved” project
- Complete and ready to be occupied
- Equipped with at least five slots
- Not a prefab house
These rules are complicated, so check carefully before assuming your condo qualifies. Again, any qualifying property must be a home you live in as your primary residence. Investment properties or second homes, such as a vacation home, would not qualify for a reverse mortgage.
HUD offers an online search tool that you can use to search for FHA-approved condos.
Reverse Mortgage Alternatives
If you don’t qualify for a reverse mortgage, there may be other options to monetize your home equity. Possibilities include:
- Home Equity Loan
- Home Equity Line of Credit (HELOC)
- Refinancing by collection
A home equity loan allows you to withdraw equity in a lump sum. This is a type of second mortgage, as the house serves as collateral for the loan. You pay the money back to the lender with interest, usually at a fixed rate. Home equity loans can have terms ranging from five to 30 years.
A home equity line of credit (HELOC) can be drawn on as needed. Your line of credit is part of the equity in your home and you only pay interest on what you withdraw. HELOCs can have an initial period during which no payments are required, followed by a repayment term (often 10 years). HELOCs generally have variable interest rates.
A cash-out refinance involves taking out a new mortgage for an amount greater than your current mortgage to (1) pay off the current mortgage and (2) withdraw cash at closing. A cash-out refi is something you might consider if you want to take money out of the equity. If interest rates are lower, you might even get a lower interest rate or monthly payment for your mortgage.
Is it hard to get approved for a reverse mortgage?
Approval for a reverse mortgage usually depends on your equity in the home, your age, and your financial resources. You cannot be approved if you have limited resources or if your home does not meet the eligibility criteria.
What’s stopping 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 primary residence, not having enough equity in the home, and not having the financial resources to pay the ongoing costs of lending. home insurance, property taxes, maintenance, and upkeep. Other disqualifications include being delinquent on federal debt or living in ineligible property.
When do you pay off a reverse mortgage?
Generally, no payment is due on the reverse mortgage balance as long as the borrower continues to use the home as their principal residence. If they sell the house, move or die, the balance becomes payable in full.
Reverse mortgages can help create a more secure retirement by providing additional income. However, getting a reverse mortgage isn’t always a straightforward process, as homeowners need to make sure they can meet the different approval requirements. 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.