Guidelines and Requirements for Reverse Mortgages
While reverse mortgages might not be what you believed them to be, they can offer help for seniors struggling with cash flow during their retirement years. However, in order to apply for such a mortgage, you’ll need to meet the requirements. In this section, we’ll discuss the FHA’s requirements for borrowers, lenders, and properties. At the end, we’ll briefly discuss potential requirements with private lenders, as well.
However, it’s important to realize that FHA-insured HECMs are not the only kind of reverse mortgage on the market. In addition to HECM loans, there are also proprietary reverse mortgages and single-purpose reverse mortgages. Requirements for these types of loans typically vary between individual lenders, and are not specifically addressed here. It may also be important to note that proprietary reverse mortgages include jumbo reverse mortgages, which are not subject to FHA lending limits, and can typically be issued in amounts of up to $3 million.
Reverse Mortgage Requirements for Homeowners
Age: Perhaps the single most important requirement is that you are the right age. You must be at least 62 years of age to apply for a reverse mortgage. Even if you’re about to turn 62, the FHA will not accept you. What’s more, every borrower on the mortgage must be at least 62 years old. However, even if you fall into the right age group, you still may not qualify for a HECM reverse mortgage.
Ownership: The home in question must be paid off or be close enough to pay off that you can accomplish that with the funds from the reverse mortgage. Ideally, you would have some of the loan proceeds left over to supplement your income, but just removing the mortgage payment could be enough to offset your financial burden.
Living Arrangements: The property you’re trying to finance must be your primary residence. Note that reverse mortgages are not available for second homes, vacation homes, or investment properties. The property must also conform with FHA/HUD requirements, which we’ll discuss in another section.
Debt: You cannot have any sort of delinquent federal debt. For instance, while it is fine if you are still paying on your federal income taxes, those taxes cannot be late – you must be current on your payments.
Financial Situation: You will need to submit to a financial assessment to determine whether you are actually able to uphold your responsibilities as a homeowner. What the FHA and the loan servicer want to see is that you are financially able to pay the property taxes, to keep the home in good repair and that you can pay for homeowners insurance and other fees (homeowners association dues and the like). You will need to submit to a credit check as well, but this is just to verify your debt situation.
Financial History and Assets: Along with a credit check and a financial assessment, your payment history (utility bills, car payments, etc.) will be assessed, as will your payment history on things like home and flood insurance. All of your financial assets, including property like boats or vacation homes, and investments, will be assessed, as well.
Reverse Mortgage Counseling
As mentioned elsewhere on this site, you will need to participate in a mandatory counseling session with a HUD-approved HECM counselor. Why? Simply put, this session is required for your protection, and to make sure that you have all the information necessary to make an informed decision. While a reverse mortgage can be beneficial, there are other, less drastic, options available that may help ease your financial burden without applying for a mortgage.
According to HUD’s HECM Protocol, section 1.2a, the role of a reverse mortgage counselor is as follows:
“To educate the client about:
The features of reverse mortgages
The appropriateness of a reverse mortgage, and
Other financial options that might meet the client’s needs
Provide guidance and resources to enable the client to make an informed decision, and
Provide ongoing support to the client throughout the process.
It is not the role of the counselor to tell the client:
Whether or not to proceed with a reverse mortgage, or
Which reverse mortgage product to use.”
It is important that you are prepared for this counseling session and that you have an understanding of the process. NRMLA and HUD have created a handy document that details exactly what you need to know about the counseling session, and how to prepare for it.
You can access and download the PDF here.
You will also receive a printed version of the PDF in your information packet prior to going to your counseling session. Note that this guide also provides a very brief overview of three types of reverse mortgage, and touches on things like costs and tax implications, as well.
If you are searching for a HUD-approved counseling agency, you can use the organization’s online agency finder to search by state and zip code here. You can also call HUD’s referral line at 1-800-569-4287.
That’s it in terms of requirements for borrowers. While the loan itself might seem confusing, it is actually one of the simplest in terms of hoops that borrowers need to jump through.
Requirements for Lenders
The requirements for lenders offering HECM reverse mortgage are the same as those that apply to all other FHA-backed loans. For instance, the institution must be a direct endorsement lender, or working with a direct endorsement lender. The FHA-approved specialist within the organization must also complete HECM training. Other requirements for lenders are as follows:
Have a control plan in place
Submit audited financial statements to the FHA regularly
Have at least three years of experience originating loans on single-family homes
Carry a fidelity bond
Carry errors and omissions insurance with at least $300,000 in protection
Be licensed to operate in all areas they serve
Have at least $1 million in net worth, plus 1% of the lender’s total value of FHA-related business over $25 million
Requirements for Properties
Finally, there are requirements that pertain to your home. If it does not meet these requirements, then you will not qualify for a reverse mortgage. However, it may be possible to invest time and money into renovations, repairs, or upgrades so that the home does conform to HUD/FHA standards.
The reverse mortgage loan requirements are actually pretty simple, and are the same as those for FHA 203(b) loans. The home must be one of the following property types:
A single-family home
A 1-4 multi-unit property with at least one unit occupied by the borrower
An FHA-approved condo
An FHA-approved mobile home
In addition, the property must be well-maintained and “meet all FHA property standards and flood requirements”, according to HUD. To ensure that the home meets these requirements, you will need to go through an appraisal prior to being approved for a reverse mortgage. The appraiser will look for a wide range of things, including safety issues like foundation damage, or loose handrails on stairs. You can find a full explanation of what an FHA appraiser looks for in the FHA Handbook here. However, you can find a brief snapshot of examples below.
Lot graded to prevent moisture from penetrating the foundation
All bedrooms have a way to access the home’s exterior
Damage to the paint that might be conducive to lead poisoning
Access to safe drinking water
Septic or sewer system in good condition
All appliances in working condition
All stairwells and steps have a functional/safe handrail
Crawl spaces are properly ventilated to disperse radon and prevent mold growth
Adequate, operational heating system
The roof is in good repair
The foundation is not damaged
No signs of health or safety hazards
In general, most homes that have had a modicum of maintenance over the years will be fine. It is also important to remember that the appraiser’s opinion is not the end of the process. If there are things found during the appraisal that bar you from moving forward, repairing the problem or rectifying the situation will allow you to pick up where you left off.