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Reverse Mortgage Requirements

If you’re planning to take a reverse mortgage, here’s a list of requirements that you must meet in order to be eligible for the loan.

Age

A reverse mortgage borrower should be at least 62 years old to apply.

Meanwhile, the U.S. Department of Housing and Urban Development (HUD) issued a new rule in 2014 for couples who are applying for Home Equity Conversion Mortgage (HECM)—a type of reverse mortgage that’s insured by the Federal Housing Administration (FHA) and makes up majority of reverse mortgages in the country.

Previously, both spouses should be at least 62 years old when applying for HECM. Because of this, some couples only put the name of the older spouse on the reverse mortgage loan. However, this resulted to major drawbacks when the older spouse died and the loan became due and payable. Because the name of the surviving spouse is not included in the reverse mortgage, he or she must repay the loan or face foreclosure.

Under the new rule, a couple can apply for HECM even when only one spouse is 62 years old. However, loan payouts will be based on the younger spouse’s age regardless if his or her name is on the reverse mortgage or not. This means that the loan amount that they will receive is lower compared to when it’s calculated on the age of the older spouse.

When the older spouse passes away, the surviving spouse can still remain in the home and foreclosure or payment of the loan can be deferred as long as certain requirements such as home maintenance, tax obligations, and insurance payments are fulfilled.

Financial Assessment

As of March 2015, HUD issued new financial assessment requirements for reverse mortgage borrowers.

Under this new rule, borrowers will be evaluated according to their capability to meet financial obligations for the duration of the loan, such as property taxes and homeowners insurance. The assessment will help the lender determine if a set-aside—an amount that will be taken from the proceeds of the loan to cover expenses while the reverse mortgage is in effect—is needed.

To evaluate a borrower, lenders will look at their income sources such as Social Security, pensions, and investments. Aside from that, lenders may have to request additional information or documentation such as tax returns, bank statements, credit report, and asset verification.

Primary Lien

A lien is a legal claim on the property of a borrower. In a reverse mortgage, the lender should hold the primary lien over your home. If there is still an existing mortgage, you may settle it beforehand or pay it off with the proceeds from the reverse mortgage.

Occupancy

You must continue to use the property as your primary residence. Typically, you can’t leave or stay out of the home for more than 12 months. If you need to stay in your other properties, move to a long-term care facility, or be hospitalized for more than a year, the loan may become due and payable.

Taxes and Insurance

You need to make regular payments on property taxes, homeowners insurance, and other required fees related to your home.

Maintenance

The home should be maintained according to the standards set by the FHA. You must shoulder the cost of repairs and other improvements needed for the property.

Inheritance

Once the reverse mortgage loan becomes due and payable at the time of the borrower’s death, the property will be typically passed on to the heirs or the estate, who must then settle the debt by paying off either the loan’s outstanding balance or 95 percent of the home’s current appraised value.

Helpful Resources:

HUD.gov, U.S. Department of Housing and Urban Development

Can Anyone Apply for a Reverse Mortgage Loan?, Consumer Financial Protection Bureau

Next topic: Important Reminders about Reverse Mortgages


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