In this post we will provide a short summary of the qualifications needed of the borrower and the property for a reverse mortgage. While there are proprietary reverse mortgage products with different requirements, we will focus on the HECM loan, which as we discussed in prior posts is the federal government insured and regulated loan product, and by far the most utilized reverse mortgage loan.

For the HECM loan, a borrower and the subject property will need to satisfy these requirements:

Age – a borrower must be at least 62 years old. We would note that, if the borrower’s spouse is younger than 62, that spouse can be considered an eligible non-borrowing spouse, and if the borrower passes away, the non-borrowing spouse is protected to be able to live in the home as long as they want, while continuing to meet the homeowner obligations like payment of taxes, insurance and property maintenance, without the loan balance coming due.

Primary residence – the property subject to a reverse mortgage must be and remain the borrower’s primary residence – 2nd homes and investment properties do not qualify.

First priority lien – a reverse mortgage must be the first priority, primary lien on the home, so that any other pre-existing mortgage on the home must be paid off, either before closing or with the proceeds of a reverse mortgage.

Financial qualifications – Income determinations are different for a reverse mortgage than for a traditional mortgage, and available funds from the reverse mortgage can be included in the borrower’s monthly income to help the borrower meet the guidelines. In general, HECM’s financial assessment guidelines provide a method of measuring the borrower’s “residual income”, which must be above a certain threshold, and which varies region by region. If the applicant does not meet the residual income threshold, the lender may require the establishment of “set asides” for certain expected property-related expenses, which will be included in the total principal amount borrowable, and so reduce the potential proceeds when the borrower is selecting lump sum, term/tenure payments or capacity on a line of credit.

Eligible property – the eligible property must generally be an owner-occupied one-to-four unit property, which can include townhouses, detached or manufactured homes and condominium units, though importantly condominiums need to be FHA-approved. As with any mortgage, the eligible property must also meet certain standards in terms of property condition.

With these requirements in mind, our next installment in this series will cover who may be a good candidate for a reverse mortgage, and, conversely, situations where a reverse mortgage may not be the preferred approach.