Exploring benefits: How Old Do You Have To Be For a Reverse Mortgage

Have you ever wondered if being eligible for reverse mortgage can make your retirement days easier and hassle-free? As a senior investor, you may have one question about your main financing option: how exactly old do you have to be for a reverse mortgage?

As a real estate investor or business owner hoping to finance their next property, a reverse mortgage can seemingly check off all the boxes. They're fairly easy to qualify for, provide additional income and don't require monthly payments. 

Over 59,000 reverse mortgages were issued in the US in 2021 alone. That's up 36% from the previous year and says everything you need to know about this financing option. 

Keep reading to find out more about reverse mortgages and their age requirements. 

What is a Reverse Mortgage?

A reverse mortgage is a loan for senior investors. It allows eligible homeowners to borrow cash, but it works very differently from a traditional loan.

Anyone with enough home equity can take a reverse mortgage loan and receive the proceeds in one go, fixed monthly payments, or a line of credit. Unlike traditional mortgages, this loan doesn’t require you to pay anything back during your lifetime.

Instead, the loan only becomes due and payable once the borrower dies, sells the home, or moves out permanently. Lenders must structure this transaction so the loan amount never exceeds the home’s value.

Even when it does, the borrower won’t be responsible for paying the difference. That’s because these mortgages are typically insured.

Reverse mortgages are designed for those who have already paid off their homes and only need to pay off a little more of their mortgage. That leaves them with pretty substantial equity.

How Does a Reverse Mortgage Work?

In a reverse mortgage, the homeowner doesn’t make payments to the lender. Instead, it’s the other way around.

As a homeowner, you can pick just how you receive the payments and only pay interest on the amount you’ve received. You don’t have to pay upfront since the loan balance collects the interest. You’ll also get to keep the title of the home.

Reverse mortgage funds can be used to cover essential expenses like property taxes and homeowners insurance, which is an important aspect of financial planning when utilizing a reverse mortgage.

Over the course of the loan, your debt will increase, and home equity will drop.

Of course, your home will be the collateral for this loan. When you move permanently or die, the money from the home’s sale will be used to pay off the loan. Any leftover money from the sale will go to you or your estate.

According to the IRS, reverse mortgages are not taxable.

Eligibility Requirements:

Beyond being at least 62 years old, other reverse mortgage requirements are pretty simple and easy to qualify for. While the minimum age requirement is 62, there is no maximum age limit for applicants, allowing older individuals access to equity in their homes. Applicants must not be delinquent on any federal debt, including income taxes or federal student loans, to qualify for a reverse mortgage. Let’s look into what it takes to

1. Property Type

If you own property built after June 15, 1976, you qualify for a reverse mortgage. This only applies to houses, townhouses, condos, and manufactured homes. 

According to the FHA, cooperative housing owners can't take out reverse mortgages since they don't technically own the house they live in – they only have shares. 

In New York, state law doesn't allow co-op owners to take out reverse mortgages.

2. Equity, Fees, and Mortgage Insurance Premium

Reverse mortgages don't have typical income or credit score requirements. But they still have some rules about what disqualifies you from getting a reverse mortgage.

Besides being 62 years old, you must own your home or have at least 50% equity. You'll need to pay:

• An up-front insurance premium

• An origination fee

• Standard closing costs

• Mortgage insurance premiums (MIPs)

• Interest

• Loan servicing fees

Lenders must follow the federal government's rules on how much they can charge for each item. 

3. Counseling

The HUD requires borrowers to complete an approved counseling session before taking out a reverse mortgage loan. The session costs around $125 and lasts 90 minutes. You'll learn everything you need to know about the loan. 

4. Collateral Protection

You must stay current on homeowner's association fees, insurance, and property taxes. Regardless of the reason, you'll have to repay the loan if you don't live in the house for over a year.

Property Requirements for a Reverse Mortgage

To qualify for a reverse mortgage,

1. The home must be the homeowner’s primary residence.
2. The property must be in livable condition, ensuring it meets safety and maintenance standards. The homeowner must have sufficient equity built up in the home, meaning they must own a significant portion (if not all) of it outright.
3. If there is an outstanding mortgage balance, it will need to be settled at the time of closing the reverse mortgage loan.
4. Homeowners will also need to pay off other home-secured debts, such as home equity loans or lines of credit (HELOCs), to qualify.

Types of Reverse Mortgages

There are two major types of reverse mortgage loans – let’s look at your options.

A reverse mortgage lender provides loans specifically for homeowners aged 62 and older, allowing them to tap into their home equity. These loans offer financial benefits such as eliminating monthly mortgage payments and receiving tax-free distributions, though repayment is necessary under certain conditions.

1. Home Equity Conversion Mortgages (HECMs): HECMs are the type you’re most likely to get. They’re also called FHA reverse mortgages since they only come from FHA-approved lenders.

2. Proprietary Reverse Mortgages: This loan allows you to borrow up to $4 million in equity. But it is worth noting that they don’t have the same regulations as an HECM.

How Much Can I Receive from a Reverse Mortgage?

The amount of money you can receive from a reverse mortgage depends on several factors, including your age, the value of your home, and the interest rate on the loan. Generally, the older you are, the more money you qualify for.

The loan amount is calculated based on the expected rate of interest and the upfront insurance premium. To get an accurate estimate of how much you can receive, you can use a reverse mortgage calculator, which takes into account these variables to provide a personalized estimate.

Advantages of a Reverse Mortgage

Reverse mortgages can be a great opportunity for senior investors. Let’s look at some of their many benefits.

An eligible non-borrowing spouse, typically under 62 years old, is protected by residency rights if the borrowing spouse passes away, ensuring they can remain in the home.

1. Additional Income for Retirees

Reverse mortgages are perfect for retirees who may not have many cash savings or investments. This loan will let them turn their illiquid assets into additional income if they have accumulated enough wealth in their properties.

2. Keeping the Property

You won't need to sell your home to liquify your assets. With a reverse mortgage, you can keep living in the property while you get cash out of it. This way, you won't get priced out of your neighborhood or worry about downsizing.

3. Paying Off Existing Home Loan

You don't need to pay off your home before you borrow a reverse mortgage. In fact, you can use the loan's proceeds to pay your existing home loan, freeing up money for other expenses. 

4. No Tax Liability

As we mentioned, the IRS considers proceeds from a reverse mortgage to be a loan advanced instead of an income. That means these proceeds don't have any tax liability. 

Disadvantages of a Reverse Mortgage

While the pros outweigh the cons, it's still wise to look at the downsides of a reverse mortgage before borrowing. 

1. High Fees and Interest Rates

You'll pay a fixed interest rate if you receive your reverse mortgage as a lump sum. The other five receiving options have dynamic interest rates that often drop or skyrocket without warning. 

Variable interest reverse mortgages are tied to benchmark indexes like the Constant Maturity Treasury (CMT). The lender often adds a 1%-3% margin to the base rate in such cases.

So, for instance, if the index rate is 2.5%, your interest rate may be 3.5%-5.5%. 

2. Possibility of Foreclosure

The borrower doesn't need to make mortgage payments, but they do need to meet certain conditions set by the lender. If they don't, the lender may choose to foreclose. 

For example, you'll need to live in and maintain the house you've loaned. Any signs of disrepair that affect the market value at the time of the sale can put you at risk of foreclosure. 

3. Susceptible to Scams

Reverse mortgages are lucrative, and their borrowers are often vulnerable and cognitively impaired. This leaves room for unscrupulous vendors to scam seniors. Caregivers, relatives, and financial advisors also often prey on seniors, reverse mortgaging a home on their behalf and stealing the proceeds. 

Alternatives to Reverse Mortgages

While reverse mortgages can be a good option for some homeowners, they may not be the best choice for everyone. Alternatives to reverse mortgages include home equity loans or lines of credit (HELOCs), refinancing, downsizing, and lowering expenses.

1. 1. Home equity loans and HELOCs can be cheaper ways to borrow cash against home equity, but they carry risks and usually have monthly payments.
2. 2. Refinancing a current mortgage with a new traditional mortgage can lower monthly mortgage payments, but it may also extend the length of time to repay the mortgage.
3. 3. Downsizing by selling a home and moving to a more affordable one may be the best option to reduce overall expenses. Lowering expenses by reducing utility bills, property taxes, and other costs can also help homeowners save money.

Before deciding, it’s important to consider all options and choose the one that best fits your financial situation.

Is a Reverse Mortgage Right For You?

A reverse mortgage is pretty similar to any home equity loan. It gives you a lump sum or line of credit to access as needed based on the home's market value. 

However, there's one difference: you don't need good credit or an income to qualify. You also won't make any loan payments while living in the house. 

A reverse mortgage may be right for you if you:

• Don't want to make monthly loan payments

• Didn't qualify for a home equity loan

• Have limited cash flow and poor credit

If you want to be 100% sure if reverse mortgage is right for you or not, you can find it out with this one single step.

FAQ 

Q: What's the minimum age for a reverse mortgage?

A: To qualify for a Home Equity Conversion Mortgage (HECM), which is the most common type, you must be at least 62 years old. If you're younger than 62, you might consider a proprietary reverse mortgage, but these loans are less common and have different terms.

Q: Can I get a reverse mortgage if I still owe money on my current mortgage?

A: Yes, you can still get a reverse mortgage if you have an existing mortgage. The money from the reverse mortgage will first be used to pay off your current mortgage. After that, any remaining funds can be used for other needs.

Q: What happens if I move out of my home permanently?

A: If you move out of your home permanently or it becomes uninhabitable, the reverse mortgage becomes due. This means the home will need to be sold to repay the loan. If the home doesn't sell for enough to cover the loan, the mortgage insurance will cover the difference.

Q: Can my heirs inherit my home with a reverse mortgage?

A: Yes, your heirs can inherit your home, but they'll need to pay off the reverse mortgage loan. They can do this by selling the home or using other funds. Any money left over after repaying the loan will go to your heirs.

Q: Will a reverse mortgage affect my Social Security or Medicare benefits?

A: No, the money you get from a reverse mortgage is considered a loan advance, not income. This means it won't affect your Social Security or Medicare benefits. However, it's always wise to talk to a financial advisor to be sure.

Conclusion: 

Reverse mortgages are only available to those over 62, at least if you choose HECM. However, if you choose the less popular proprietary reverse mortgage, you may be able to get the loan at a younger age.

Since they aren't government-backed, you'll need to be wary with your choice of lenders.

Before you commit to a reverse mortgage, remember to do your research and read the fine print. And don't forget to connect with the experts to make the process hassle-free for you!