10 Reverse Mortgage Rules You Should Know
If you’re a senior and own a home, you’ve probably heard about reverse mortgages — they allow you to convert your home equity into cash. However, reverse mortgage rules are very different from the rules for traditional home loans. Knowing the rules can help you decide if a reverse mortgage is right for you.
The most common reverse mortgage program is the home equity conversion mortgage (HECM), which is insured by the Federal Housing Administration (FHA). Some private lenders also offer their own reverse mortgage products, but the guidelines below apply to HECM loans only.
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. Typically, the older you are, the more you can borrow with a reverse mortgage. However, if you apply with a co-borrower, your loan limit will be based on the youngest borrower. Further, if you have a spouse, your loan limit will be based on the youngest spouse’s age.
Rule #2: You need to have significant home equity
Reverse mortgages work best if you own your home outright, but in most cases, you’ll 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’ll 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 investment properties or vacation homes.
Tip: Don’t forget to certify your occupancy status
Each year, reverse mortgage lenders will ask you to verify that you still live in your home as your main residence. If you don’t return the certification, the lender could foreclose on your home.
Rule #4: You can’t be delinquent on federal debt
Lenders must confirm you’re not already in default on federal debt. This includes student loans and child support, but doesn’t include income taxes. Lenders will run your name through the Credit Alert Interactive Verification Reporting System (CAIVRS) to confirm this 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, you do need to show the lender that you have the means to afford the ongoing costs of homeownership, including property taxes and homeowners insurance premiums. You’ll also need to keep your home in good repair.
Tip: Always pay your 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.
Rule #6: You must meet with a reverse mortgage counselor
Because reverse mortgages come with unusual features, the U.S. Department of Housing and Urban Development (HUD) requires you to participate in HUD-approved reverse mortgage counseling. You can use the HECM Counselor Roster to find a reverse mortgage counselor or call 800-569-4287.
Rule #7: You can choose how you receive your reverse mortgage funds
The table below shows four ways you can receive money from a HECM:
| Option | How it works |
|---|---|
| 1. One lump sum | Receive all your funds at once and pay interest on the entire amount. |
| 2. Monthly payouts |
|
| 3. Line of credit | Set up a credit line and use it as needed, paying interest on only the funds you use. |
| 4. Hybrid options |
|
Rule #8: You can’t borrow more than the limits for your area
Much like FHA loan limits, how much you can borrow with a HECM changes every year. The maximum claim amount for 2024 is $1,149,825. If you’re looking for a higher loan amount, you’ll have to go with a private lender — but be aware that there’s no federal insurance backing those loans, which means they may be more costly.
Rule #9: You must pay mortgage insurance
Like other FHA-backed loans, you’ll pay FHA mortgage insurance to protect the lender against losses in case you default on the loan. The upfront mortgage insurance premium is 2% of your loan amount and is usually added to your loan balance — however you can choose to pay it in cash. The annual MIP charge is 0.5% of your loan balance, which you must pay monthly.
One unusual feature of HECMs is that your loan amount grows over time, which means that your annual MIP charges will also increase.
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
- An FHA-approved condominium unit
- A manufactured home that meets FHA requirements