10 Reverse Mortgage Rules You Should Know
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If you’re 62 or older and own a home, you’ve probably heard about reverse mortgages, which allow you to convert your home equity into cash. However, reverse mortgage rules are very different from traditional home loans. Knowing the rules will help you decide if a reverse mortgage is right for you.
10 reverse mortgage rules you should know
The most common reverse mortgage program is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). Private lenders may offer their own reverse mortgage products, but the guidelines below apply to HECM loans.
Rule #1: You must meet the age requirement
There’s no way around this one. You must be at least 62 years old to get a reverse mortgage. If you apply with someone else, your loan limit will be based on the youngest borrower. Typically, the older you are, the more you can borrow with a reverse mortgage.
Rule #2: You need to have a good chunk of home equity
Reverse mortgages work best if you own your home outright, but in most cases, you need at least 50% equity for a reverse mortgage to make sense.
Rule #3: You must live in the home you’re financing
The HECM guidelines are strict about occupancy: You need to live in your home for most of the year. One of the main benefits of a reverse mortgage is it allows you to age in place, and that place is the home that secures your reverse mortgage. Reverse mortgages can’t be used to finance vacation homes or rental properties.
Rule #4: You can’t be delinquent on federal debt
Because the HECM program is insured by a federal government agency, the FHA, approved lenders must confirm you’re not in default on any federal loans like student loans or income taxes. They check the Credit Alert Interactive Reporting System (CAIVRS) to confirm that before you receive final approval for a reverse mortgage.
Rule #5: You must prove you can pay ongoing housing costs
Although you don’t need income to qualify for a reverse mortgage, the lender must show that you have the means to pay the ongoing debt, including property taxes and homeowners insurance premiums. You also need to cover the costs of keeping your home in good condition.
Rule #6: You must meet with a reverse mortgage counselor
Because you’re taking out a loan that grows over time instead of shrinks, the U.S. Department of Housing and Urban Development (HUD) requires you to get HUD-approved reverse mortgage counseling.
Reverse mortgage rule #7: You need to choose how to take your reverse mortgage funds
The table below shows six ways you can receive money from a HECM:
|Option||How it works|
|1. One lump sum||Receive all your funds at once with a fixed-rate payment|
|2. Tenure||Choose regular monthly payments for as long as you or a co-borrower are in the home|
|3. Term||Choose regular monthly payment for a set number of months|
|4. Line of credit||Set up a line of credit and use it as needed (similar to how a home equity line of credit or HELOC works)|
|5. Modified tenure||Set up a line of credit and regular monthly payments for as long as you, a spouse or co-borrower live in the home|
|6. Modified term||Set up a line of credit and schedule monthly payments for a specific time period|
Rule #8: You can’t borrow more than the limits for your area
Each year the FHA loan limits change, along with the “maximum claim amount,” which restricts how much homeowners can borrow with a HECM. The maximum claim amount for 2021 is $822,375. Private companies may offer high loan amounts with their proprietary reverse mortgage programs, but there is no federal insurance backing and they may be more costly.
Rule #9: You must pay mortgage insurance
Like other FHA-backed loans, you’ll pay mortgage insurance to protect the lender against losses in case you default. The upfront mortgage insurance premium is 2% of your home’s value and is usually added to your loan amount. The annual MIP charge is 0.5% of your loan balance, which you pay monthly.
One important note about HECM MIP: Because your loan amount increases over time, your annual MIP charges will also rise.
Rule #10: Your home must be an acceptable property type
Reverse mortgage rules only allow financing on the following types of homes.
- A single-family home
- A two- to four-unit home as long as the owner lives in one of the units
- A HUD-approved condominium unit
- A manufactured home that meets FHA requirements
How to avoid breaking reverse mortgage rules
Even though you don’t have to worry about missing monthly mortgage payments with a HECM loan, you should follow certain rules so you don’t end up in trouble with your reverse mortgage lender.
Pay your homeowners insurance and property taxes on time. If you get behind on property taxes, not only could you end up defaulting on your reverse mortgage, but you could lose your home to a property-tax lien foreclosure. Ask your lender about setting aside a portion of your reverse mortgage money to keep these bills current.
Keep up with home maintenance. Reverse mortgage lenders may periodically inspect your home to make sure it’s in good condition. They might require you to use some of the reverse mortgage funds to make needed repairs.
Continue to use the home as your primary residence. Each year, reverse mortgage lenders will ask you to verify you still live in your home as your main residence. If you don’t return the certification, the lender could foreclose.