There is no foolproof plan to guarantee financial security in your senior years. You can save, you can buy insurance, you can invest intelligently and reallocate annually. Yet even with all these measures, you may still find that rising costs, unexpected home repairs and mounting medical bills can throw a wrench at your meticulous financial plans.
When this happens, you might turn to a reverse mortgage. But what happens when you don’t qualify for one?
For some people, the answer might be to apply again later. For others, it could be that a reverse mortgage isn’t the appropriate financial solution. Luckily, there are alternatives.
In this article, we will cover:
What is a reverse mortgage?
A reverse mortgage is a type of equity loan specifically designed for seniors ages 62 and above to give them a source of income in retirement. Instead of having to make payments to a lender to repay the loan, a reverse mortgage requires no payment until the borrower no longer lives in the home.
Borrowers can access the money as monthly payments from the lender to their bank account, a line of credit or a lump sum, depending on what the funds are needed for. When the borrower passes away or sells the home, the reverse mortgage gets paid back through the value of the home.
Reverse mortgages offer numerous benefits. First, if you choose the monthly payment option, this income stream can help you maintain your current lifestyle and ensure you don’t have to sell your home. There are a variety of needs and wants of senior homeowners, and if applicants want to continue to age in place then this is one alternative,” said Steve Irwin, executive vice president of the National Reverse Mortgage Lenders Association (NRMLA).
There also are no prepayment penalties if you want to pay off the loan early. And unlike home equity loans, reverse mortgages are non-recourse loans. That means that if the value of the property falls below the principal once it’s time to settle the loan, the lender will only take the proceeds of the sale and not tap into other assets.
Many people think that a reverse mortgage is a way to assign ownership of their home over to a lender, but that’s not the case. “At no time does any reverse mortgage borrower give up ownership of their home. It’s a false premise,” Irwin said.
However, there are also several downsides to reverse mortgages. The balance of this type of loan grows over time, continually eating into your equity. They also make it difficult to pass on a home through inheritance, since in many cases the home must be sold to repay the reverse mortgage.
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), backed by the U.S. Department of Housing and Urban Development.
There are also proprietary reverse mortgages offered by private lenders as well as reverse mortgages offered by state government agencies and nonprofits to help homeowners pay for repairs and property taxes.
What can disqualify you from a reverse mortgage?
As with any kind of loan, there are certain minimum requirements necessary to be approved for a reverse mortgage. Not meeting these guidelines will get you disqualified.
One of the most basic requirements is the age of the borrower. In nearly all cases, borrowers must be 62 or older.
It’s even possible that the age of a younger spouse who’s not applying for the loan can get you disqualified. Lenders want to ensure that the non-borrowing spouse can sustain themselves in the home over their lifetime as well.
Your credit and spending history
While your credit score isn’t the final determinant of whether you will qualify for a reverse mortgage, lenders will look at your credit history and current expenses.
To be approved, lenders want to see that you’re able to meet your financial obligations. Sometimes that’s with your existing retirement savings. But some people may also fail to qualify for a reverse mortgage if the loan itself won’t provide enough cash to meet expenses. Underwriters consider regional averages for the cost of prescription drugs, food, property maintenance and other factors. “Reverse mortgage has to be a solution for that senior homeowner,” Irwin said.
Sometimes, it’s not the borrower that’s disqualified from a reverse mortgage, but the property.
For starters, the property must be a single-family home or a borrower-occupied residential building with two to four units. In some cases, condominium projects and manufactured homes may also qualify. These properties also need to be in good repair.
While there is no set amount of equity required to qualify, a general rule of thumb is to make sure that you have at least 50% equity in the property. If your existing mortgage is too high, you might not qualify for a reverse mortgage.
FAQs on requalifying for a reverse mortgage
In many cases, getting disqualified from a reverse mortgage isn’t a permanent situation. You may be able to qualify in the future as your circumstances change. Let’s look at a few situations that may merit reapplying.
What happens if I was disqualified due to bankruptcy?
If you applied for a reverse mortgage while going through bankruptcy, you may have been disqualified if the procedures weren’t finalized. In this case, you might consider reapplying after the bankruptcy is discharged.
One note: In a Chapter 13 bankruptcy, there may be requirements that the bankruptcy be paid off at the reverse mortgage closing, unless the court says otherwise.
What should I do if I was disqualified because of my credit history?
In many cases, reverse mortgage underwriters will consider special situations and consider working around them. They can also reconsider you when your credit history changes. If you can show that your credit profile has improved or explain special circumstances, underwriters can decide to approve your loan.
What if my disqualification was due to having too little equity in my home?
You might be disqualified if the amount you’re approved to borrow in a reverse mortgage isn’t enough to pay off your existing mortgage and sustain you in the home. When that happens, you can wait until you’ve made additional principal payments on your mortgage and increased your equity. To speed this up, you might consider making larger monthly payments.
Is there anything I can do after being disqualified because it wasn’t my primary home?
It depends. Lenders require you to reaffirm annually that the home with the reverse mortgage is your primary residence. If you live in another location part of the year, you can only get the loan on the home that houses you for the majority of the year — and you must let your lender know if you will be gone for more than two months.
Alternatives to reverse mortgage if you don’t qualify
Some borrowers can qualify after being additional turned down for a reverse mortgage, but others might need to find an alternative answer. When your situation doesn’t lend itself to being requalified in the future, consider looking into the following alternatives.
If you were disqualified from a reverse mortgage because the equity in your home was too low, then you might want to consider a cash-out refinance. This can both lower the overall interest rate on your mortgage and allow you to access up to 85% of your equity.
Home equity loan or line of credit
If you have enough income to pay a monthly mortgage, then you may want to consider a home equity loan or line of credit. Depending on your credit score, you may be able to secure one with a low interest rate that offers a short term and an affordable payment. These would not be good options for those who need to use the funds to help sustain living expenses.
If you don’t have enough equity home or you’re younger than 62, a personal loan could be a good fit to help meet a short-term financial obligation. These loans are generally not secured by any underlying collateral. However, be careful not to choose one with a very high interest rate.
Sell and downsize
If the goal of a reverse mortgage is to help you afford the home you’re in, then it’s possible another type of loan won’t help you stay in the home either. A better long-term solution in that case could be to sell your home and downsize to a more affordable living situation.
Local benefit programs
Your city and state may have programs that help local homeowners pay for electricity, property taxes and home improvement costs. There are also grant programs available through organizations like the United States Department of Agriculture and Rural Development.
At the end of the day, it’s worth noting that a reverse mortgage just isn’t a good fit for every homeowner.
The bottom line
Reverse mortgages can be powerful, flexible tools that help seniors age in place, maintain their lifestyle and even fund their post-retirement dreams, but they aren’t the right tool for every senior homeowner. Understanding the nature of a disqualification and determining whether it can be overcome will help you decide to pursue a reverse mortgage or find an alternative solution.