As you get closer to retirement, you may be thinking about how to make the most of your nest egg. One option is a reverse mortgage, which can give you access to some of your home equity without having to sell your house or take on a new loan. But how much equity do you need for a reverse mortgage? And what are the other factors you need to consider? Keep reading for answers to these questions and more.
To qualify for a reverse mortgage, you need to own your home outright or have significant home equity. How much equity do you actually need to have in order to get a reverse mortgage? The specific percentage varies from lender to lender and the type of loan, but the general rule is to have 50 percent value of your home’s worth in equity.
- The general rule is to have 50 percent value of your home’s worth in equity to qualify for a reverse mortgage.
- Unlike a traditional mortgage in which you make monthly payments to the lender, with a reverse mortgage loan, the lender makes payments to you.
- There are three types of reverse mortgages: Home Equity Conversion Mortgages (HECM), Proprietary reverse mortgages, and Single-purpose reverse mortgages.
Understanding The Basics of Reverse Mortgage
A reverse mortgage allows you to tap into the equity in your home and access your funds in the form of a lump sum, regular payments, or a line of credit. Depending on how much home equity you have available, this can be a great way to generate some cash flow during your retirement years.
Unlike a traditional mortgage in which you make monthly payments to the lender, with a reverse mortgage loan, the lender makes payments to you. The loan is repaid when you sell your home or pass away (at which point your estate will need to pay off the loan balance).
The Qualify for a Reverse Mortgage You Must:
- Be at least 62 years old
- Own your home outright or have significant equity in your home
- Occupy the property as your primary residence
- Be able to pay for ongoing property taxes and insurance
- Must meet with a HUD-Approved HECM Counselor.
Three types of reverse mortgages include:
- Home Equity Conversion Mortgage (HECM): The most common type of reverse mortgage is insured by the Federal Housing Administration (FHA).
- Proprietary reverse mortgages: These loans are offered by private lenders and may have fewer fees than HECM loans, but they aren’t insured by the FHA. Examples include Jumbo Reverse Mortgages and Reverse Mortgage for 55+.
- Single-purpose reverse mortgages: Offered by some state and local governments as well as non-profit organizations to help with paying home repairs or property taxes.
How much equity is required for reverse mortgage?
The value of the equity you have built up in your home is one of the most important pieces of information regarding your home’s finances, and there is a good reason for this. When all is said and done, the sum total of how much money you have already paid and how much money you still owe will ultimately reveal how much money you currently have that is accessible to you.
The type of payment you pick will have a significant influence on your loan amount. In many cases, a monthly payment or credit line option may result in more money than a single disbursement.
You can use a opens in a new windowreverse mortgage loan calculator to get a rough idea of how much money you might be eligible to receive. If you need a more accurate estimate, speaking with a reverse mortgage consultant is the best way to get tailored information for your unique situation.
Since home equity is such an important factor in a reverse mortgage, it’s essential to know how to calculate it. To find out your home equity, simply subtract the amount of any outstanding mortgage loans from your home’s appraised value or market value (if you don’t have a current appraisal).
How much credit you can get as a borrower through a home equity loan is determined by how much equity you already have in your home. Consider the following scenario: you end up owing $150,000 on your mortgage but your home is worth $250,000. If you take the value of the home and deduct the amount still owed on the mortgage, you will arrive at the amount of home equity that you have, which is $100,000.
HUD’s Ambiguity Around Home Equity Requirements
The general rule of thumb is that you need 50% equity to qualify for a reverse mortgage. However, the devil is in the details, as they say.
The U.S. Department of Housing and Urban Development (opens in a new windowHUD), which oversees the HECM program, doesn’t specify a minimum equity requirement. HUD does require that borrowers receive counseling from an independent housing counselor before taking out a reverse mortgage, but the organization lacks clarity on how it assesses borrowers’ eligibility.
However, most HECM lenders have their own internal guidelines for determining home equity requirements. These thresholds can vary significantly depending on various factors including the borrow’s age. Keep in mind that the maximum payout or reverse mortgage limits for a reverse mortgage in 2022 is $970,880.
How Much Can I Borrow Through a Reverse Mortgage?
The amount you can borrow depends on factors, including your age, the appraised value of your home, and interest rates. To get a more accurate estimate of how much you may be able to borrow with a reverse mortgage, contact a lender or consult with a certified reverse mortgage counselor. In times of rising interest rates, it’s advisable to lock in a loan as soon as possible. In general, the lower the rates, the more you can borrow.
Other reverse mortgage requirements
Besides the main requirements mentioned above, the exact qualifications will depend on the type of reverse mortgage you’re looking for. For example, a Jumbo Reverse Mortgage may have different requirements than a standard HECM. In addition, various lenders may have their own eligibility criteria.
Before taking out a reverse mortgage, it’s important to do your research and speak to a qualified loan advisor to determine whether you’re eligible, what type of reverse mortgage would best suit you, and how much money you can borrow.
HECM property requirements
In addition to meeting the basic criteria for a reverse mortgage, there are some additional property requirements that must be met. Below are some of the main requirements:
- Property must be in good condition with no pending or unaddressed repairs. The property may not be used for commercial purposes and must meet HUD’s minimum standards for health and safety.
- Condos, townhomes, and manufactured homes must meet opens in a new windowFHA standards and;
- Other types of homes such as vacation homes and investment properties do not qualify for a HECM reverse mortgage.
What if you don’t have enough equity for a reverse mortgage?
If you don’t have enough equity to qualify for a reverse mortgage, there are still a few options available. Below I list some of the main options:
1. Refinance your mortgage
By refinancing your mortgage, you will be able to lower your monthly payments and free up some extra cash. This can be a good alternative to a reverse mortgage since the total cost of the loan will be smaller.
2. Get a home equity loan or line of credit
This could be a good alternative to a reverse mortgage if you still want to tap into the equity in your home but don’t want to move. With a home equity loan or line of credit, you can borrow against the equity in your home and make monthly payments. However, keep in mind that with a home equity loan, you will need to make monthly payments and if you default on the loan, you could lose your home.
3. Sell your home
If you’re not attached to your home and you need the money, selling your home could be a good option. Doing so will allow you to get cash for your home and use the money to pay off any debts or invest in other areas of your life. You can use to proceeds to downsize to a smaller home, buy a condo, or even rent an apartment.
When should you take out a reverse mortgage?
There is no right or wrong time to take out a reverse mortgage. It depends on your individual financial and personal circumstances. Some factors you may want to consider include your age, the value of your home, and whether you have other debts or expenses that need to be paid off.
If you only need to take out a small amount, a reverse mortgage might not be the best option. In addition, if you’re planning on selling your home in the near future, a reverse mortgage may not be right for you either. On the other hand, if you’re retired and need extra money to cover living expenses or medical bills, a reverse mortgage could be a good solution.
The Bottom Line
A reverse mortgage can be a good solution for retirees who need extra money to cover living expenses or medical bills. Key factors in determining the equity needed include the value of your home, the equity you have in your home, and your age. To get the most accurate estimate, you should speak to a reverse mortgage consultant.
I am more than 20 years of experience in the industry and can help you decide whether a reverse mortgage is right for you. Feel free to contact me today if you have any questions or want to discuss your options in more detail.