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How Much Equity Do You Need for a Reverse Mortgage?
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To qualify for a reverse mortgage, borrowers must own their home outright or have significant equity. Exactly how much equity do you need for a reverse mortgage? The specific percentage varies by lender and the type of reverse mortgage, but the general rule of thumb is to have at least 50% equity in your home.
Understanding reverse mortgage and home equity basics
A reverse mortgage provides senior homeowners with access to their home equity. Instead of making payments that decrease the loan balance — as with a traditional mortgage — reverse mortgage loan borrowers receive payments from the equity in their home.
Over time, the mortgage balance grows, and home equity decreases. The loan becomes due when the borrower no longer lives in the house.
The most common type of reverse mortgage is the home equity conversion mortgage (HECM), which the federal government insures.
The amount of equity required to qualify for a reverse mortgage and how much you can borrow will depend on various factors. For HECMs, lenders will typically look for at least 50% equity in the home. Additionally, they’ll consider the following when determining how much you can take out:
- Home value
- Your age
- Current interest rates
- Your ability to pay property taxes and homeowners insurance
- Your reverse mortgage payment option
- Upfront and ongoing reverse mortgage costs
Reverse mortgage examples
Here’s a look at a few reverse mortgage examples to illustrate how equity plays a role in how much you can borrow. In each instance below, the homeowner has a single-unit property and is taking out a HECM with the lump sum payment option.
|Reverse mortgage example #1|
|Current loan balance||$0|
|Estimated lump sum payment||$197,312|
In the scenario above, the borrower owes the home outright, so they have 100% equity. They qualify for an estimated lump sum payment of $197,312, representing about 49% of the home’s value.
|Reverse mortgage example #2|
|Current loan balance||$100,000|
|Estimated lump sum payment||$97,312|
In this reverse mortgage example, the borrower owes $100,000 on their mortgage. They qualify for an estimated lump sum of $97,312.
|Reverse mortgage example #3|
|Current loan balance||$225,000|
|Estimated lump sum payment||$0|
In this scenario, the borrower only has 44% equity in their home, and therefore wouldn’t qualify for a reverse mortgage.
Do I have enough equity for a reverse mortgage?
What you’re eligible for will depend on your circumstances and reverse mortgage terms. For example, if you’re younger and the sole titleholder, you’ll need more equity to qualify. In the first example above — where the homeowner owns a $400,000 home outright — a 62-year-old borrower would only receive a $176,360 lump sum.
The payment type you select will also affect your loan amount. In many cases, you may receive more with a monthly payment or credit line option than with a single disbursement.
A reverse mortgage calculator can estimate your payout; however, a HECM counselor approved by the U.S. Department of Housing and Urban Development (HUD) and reputable reverse mortgage lenders will provide more accurate figures based on your financial situation.
Other reverse mortgage requirements
Having enough home equity is one of several reverse mortgage requirements. Again, the exact qualifications will depend on your lender and reverse mortgage program. For the HECM program, you’ll need to meet borrower and property requirements enforced by the Federal Housing Administration (FHA). Here’s a look at how to qualify for a reverse mortgage:
HECM borrower requirements
→ Must be 62 or older
→ Must live in the home as your primary residence
→ Must not be delinquent on any federal debt
→ Must be able to pay property taxes, insurance and homeowners association (HOA) fees (if applicable)
→ Must meet with a HUD-approved HECM counselor
HECM property requirements
→ Property must meet FHA property standards and flood requirements
→ Property type must meet FHA guidelines
→ Property must be in good condition
What if you don’t have enough equity for a reverse mortgage?
If you don’t meet your lender’s equity requirements for a reverse mortgage loan, you may have other options. Whether your primary goal is to access your home equity or reduce your mortgage payments, one of the alternatives below may fit your situation.
If you’re looking to reduce your financial obligations but don’t meet your lender’s reverse mortgage requirements, refinancing your home with a traditional, forward mortgage can lower your mortgage payments. With this option, you’ll still make monthly payments; however, they could be significantly less depending on your loan term, interest rate and outstanding mortgage balance.
A cash-out refinance provides some of the same benefits of a reverse mortgage, such as access to your home equity. But unlike a reverse mortgage, you’ll be rebuilding your equity as you make monthly payments.
You’ll pay closing costs with a cash-out refinance, and depending on how much you borrow, you may also need to pay private mortgage insurance. So be sure to consider whether the cost of a cash-out refinance works for your overall financial plan.
Home equity loan
A home equity loan provides access to your equity and could be a cheaper alternative to a reverse mortgage. Like a reverse mortgage loan with a single disbursement, you’ll receive a lump sum upfront; however, you’ll make scheduled payments. That means if you already have a first mortgage, you’ll have two monthly loan payments to manage. If you experience difficulty handling all your obligations, you could lose your home to foreclosure.
Home equity line of credit
A home equity line of credit (HELOC) is similar to a home equity loan in that it’s an additional loan on top of your existing mortgage (if you have one). However, instead of receiving a lump sum payment, you’ll have continued access to your available equity, similar to how a credit card works, during a specific time period.
If your home is too big or too costly to maintain, a cheaper alternative to a reverse mortgage is to sell it and downsize to a smaller, less expensive home or apartment. With this strategy, you can use the proceeds from the sale to purchase or lease your new place. If you opt for an apartment complex or community designed for senior residents, you’ll likely have access to on-site amenities — an added bonus.
If you’re considering a reverse mortgage loan to supplement income and are old enough to access your retirement accounts without withdrawal penalties, tapping into your savings may be a less costly way to meet your needs.