The concept of a Reverse Mortgage is certainly familiar to homeowners aged 62 and above who are interested in tapping into their home’s equity. It’s a convenient loan for older adults to get some extra cash. According to FHA data, the number of HECM loans that were endorsed and taken out by borrowers in 2022 increased to 64,437 from 49,207 the previous year.
However, Reverse Mortgage regulations are vastly different from those of standard mortgages. But how does reverse mortgage work? And what it takes to qualify for one?
Federal Housing Administration (FHA)-insured Home Equity Conversion Mortgages (HECMs) are the most common kind of reverse mortgage. Although private lenders may provide their own reverse mortgage options, the following requirements are exclusive to HECM loans. To qualify for this mortgage, you must fulfill these minimum standards:
The Minimum Age Requirement
This is something that can’t be avoided. To qualify for a reverse mortgage, you typically need to be 62 or older. Loan amounts for joint applicants depend on the age of the youngest borrower. A reverse mortgage often allows you to borrow more money the older you are.
You’ll Need a Sizable Amount of Equity in Your Property
Having full ownership of the house is ideal for a reverse mortgage, but in most circumstances, at least 50% equity is required.
Your Primary Residence Must Be The One You’re Financing
You must be a permanent, full-time resident of the house to qualify for a HECM loan. One of the key advantages of a reverse mortgage is that it enables you to stay in the property you already own as you age. You can’t use a reverse mortgage to buy a second house or finance a rental property.
You Cannot Be Late on Your Federal Debt
Lenders that participate in the HECM program are required by the FHA to verify that they are not behind on any other federal obligations, such as student loans or tax payments. Before giving their final OK on a reverse mortgage, they run your name via the Credit Alert Interactive Voice Response System (CAIVRS).
You Have To Show That You Can Afford The Rent Each Month
Although regular income isn’t required to get a reverse mortgage, you still need to prove to the lender that you can afford to keep up with the monthly payments and other costs associated with the loan. Maintaining a habitable house also requires financial provisions.
You Must Consult With a Reverse Mortgage Consultant
The U.S. Department of Housing and Urban Development (HUD) mandates counseling before you take out a reverse mortgage since it is a debt that accrues interest rather than decreases.
There Are Maximum Loan Amounts Set By Region
The maximum claim amount and FHA loan limitations both fluctuate annually, putting a cap on how much a homeowner may borrow under a HECM.
In 2023, you can submit a claim for a maximum of $1,089,300. Private lenders may provide access to larger loan amounts via their own proprietary reverse mortgage schemes; however, these loans may be more expensive and lack government insurance backing.
Your House Must Be of An Eligible Property Type
The following categories of properties are eligible for reverse mortgage financing:
(i) An independent dwelling unit
(ii) A two- to four-family dwelling in which at least one of the occupants is the owner
(iii) A condo unit with HUD’s stamp of approval
(iv) A manufactured house that is FHA-approved
Avoid Violations of Reverse Mortgage Laws
Although a reverse mortgage loan eliminates the need to make regular mortgage payments, borrowers still need to be careful to avoid getting in trouble with their reverse mortgage lender.
Don’t Let Your Mortgage and Property Taxes Pile Up
You risk losing your house to a property-tax lien foreclosure if you fall behind on your property taxes and also fail on your reverse mortgage. Inquire about the possibility of having some of the proceeds from your reverse mortgage put aside for this purpose.
Perform Routine Upkeep on Your House
Lenders of reverse mortgages may conduct routine inspections of the property. They may insist you use part of the reverse mortgage money for maintenance.
Use The House as Your Principal Abode For The Foreseeable Future
Reverse mortgage lenders often check-up with borrowers annually to make sure they are still making the house their primary residence. The lender might foreclose on you if you don’t turn in the certification.
Final Thoughts
The main qualification criteria for a reverse mortgage are that you are at least 62 years old and own a significant amount of equity in your home. However, as you can see, there are a lot of different things to keep in mind when applying for one. Still, if you are looking for a good way to access additional money from your home’s equity, the HECM may be the right mortgage option for you.
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