How Much Equity Do You Need for a Reverse Mortgage?
To qualify for a reverse mortgage, you must own your home outright or have significant home equity. The specific equity percentage varies by lender and reverse mortgage program, but the general rule of thumb is to have at least 50% equity in your home before applying.
Understanding reverse mortgage and home equity basics
A reverse mortgage gives senior homeowners access to extra income by leveraging their home equity. Instead of making payments that reduce the loan balance — as with a traditional mortgage — reverse mortgage borrowers receive payments from their home equity.
Over time, the mortgage balance grows and home equity decreases. The loan becomes due when the borrower moves out of the home or dies.
The most common type of reverse mortgage is the home equity conversion mortgage (HECM), which is insured by the federal government’s Department of Housing and Urban Development (HUD).
The amount of equity required to qualify for a reverse mortgage and the amount you can borrow depend on various factors. For HECMs, lenders typically require at least 50% home equity. Additionally, they consider the following when determining how much you can borrow:
- Your home’s value
- Your age
- Current interest rates
- Your ability to pay annual property taxes and homeowners insurance
- Your reverse mortgage payment option
- Upfront and ongoing reverse mortgage costs
Ready to learn more? Here are some reverse mortgage pros and cons to consider.Reverse mortgage examples
Here’s a look at a few reverse mortgage examples to illustrate how equity affects how much you can borrow. In each instance below, the homeowner has a single-family home and takes out a HECM with the lump-sum payment option.
| Reverse mortgage example #1 | |
|---|---|
| Borrower’s age | 72 |
| Home value | $400,000 |
| Current loan balance | $0 |
| Current equity | 100% |
| Estimated lump-sum payment | $197,312 |
In the scenario above, the borrower owns the home outright and has 100% equity. They qualify for an estimated lump-sum payment of $197,312 — about 49% of the home’s value.
| Reverse mortgage example #2 | |
|---|---|
| Borrower’s age | 72 |
| Home value | $400,000 |
| Current loan balance | $100,000 |
| Current equity | 75% |
| 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 payment of $97,312.
| Reverse mortgage example #3 | |
|---|---|
| Borrower’s age | 72 |
| Home value | $400,000 |
| Current loan balance | $225,000 |
| Current equity | 44% |
| Estimated lump-sum payment | $0 |
In this scenario, the borrower has only 44% home equity and wouldn’t qualify for a reverse mortgage.
Do I have enough equity for a reverse mortgage?
Your eligibility depends on your circumstances and the terms of your reverse mortgage. For example, if you’re younger and the sole titleholder, you’ll receive a smaller payout. Consider the first example above of a 72-year-old homeowner owning a $400,000 home outright and getting a $197,312 lump sum — a 62-year-old borrower in the same situation would receive only a $176,360 lump sum.
The payment option you select will also affect your loan amount. In many cases, you may receive more with a monthly payment or credit line option than a lump-sum payout.
A reverse mortgage calculator can estimate your payout, but a HUD-approved HECM counselor and reputable reverse mortgage lenders can provide more accurate figures based on your financial situation.
Other reverse mortgage requirements
The exact requirements you’ll need to meet will depend on your lender and reverse mortgage program. For the HECM program, there are borrower and property requirements enforced by the Federal Housing Administration (FHA). Here’s how to qualify for a reverse mortgage:
HECM borrower requirements
- Must be at least 62 years old
- 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 any applicable homeowners association (HOA) fees
- Must meet with a HUD-approved HECM counselor
HECM property requirements
- Must meet FHA property standards and flood zone requirements
- Must meet FHA guidelines for property type
- 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 goal is to access your home equity or lower your mortgage payments, one of the alternatives below may fit your needs.
Refinance
If you want to reduce your financial obligations but don’t qualify for a reverse mortgage, refinancing your home with a traditional, forward mortgage could lower your mortgage payments. With this option, you’ll still make monthly payments, but they could be significantly lower, depending on your loan term, interest rate and outstanding mortgage balance.
Cash-out refinance
A cash-out refinance provides similar benefits to a reverse mortgage, such as tapping your home equity. But unlike a reverse mortgage, you rebuild 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 (PMI). 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 may be a cheaper alternative to a reverse mortgage. Like a reverse mortgage with a single disbursement, you receive a lump sum upfront. But unlike a reverse mortgage, you’ll make fixed monthly payments. This means if you already have a first mortgage, you’ll have two loan payments to manage each month. If you default on your payments, 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. However, instead of receiving a lump sum, you have ongoing access to your available equity — similar to a credit card — during a specific time period.
Home sale
If your home is too big or expensive to maintain, a cheaper alternative to a reverse mortgage is to sell it and downsize to a smaller, more affordable house or apartment. With this strategy, you can use the sale proceeds to purchase or lease your new place. If you opt for an apartment complex or community designed for seniors, you’ll likely have access to on-site amenities — an added bonus.
Retirement savings
If you’re considering a reverse mortgage 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.