Reverse Mortgage Eligibility

Gone are the days of qualifying for a reverse mortgage simply because one had equity in one's home. Gone also are soft income and credit guidelines, the days of delivering 100% of proceeds at closing, loans funded without mandated / proper education. Reverse loans aren't as easy as they once were but they are much safer and still a great way to access dormant home equity.

Is it hard to qualify for a reverse mortgage?   Well, yes and no.  FHA, VA and Fannie Mae /Freddie Mac loans (forward loans) have always required borrowers to have a stable source of income and to meet 'debt ratio' guidelines; and now reverse mortgages require income qualification too. Reverse borrower income is based on a ‘residual income’ system designed to make sure that borrowers can meet basic obligations.. This is technically called ‘financial assessment’ and is one of the new (HUD letter ML-2013-27) protections enacted by FHA to make certain that borrowers can cover ongoing expenses. 

What is the minimum credit score required for a reverse mortgage?, Reverse mortgages do not require a credit score minimum, but borrowers must meet very specific credit guidelines that illustrate a history of ‘willingness and capacity’ in terms of making payments. Reverse credit guidelines can be even stricter than on the forward side. For example, something as simple as a property tax payment that is 2 weeks late can change the amount of funds that will be made available. Old credit report issues that might be overlooked on an FHA or Conventional loan can have a negative impact too.  On the other hand... reverse lenders can offer a provision much like an impound account that allows for some credit guideline flexibility. The bottom line, though, is that the Financial Assessment credit standards enacted in 2013/2014 are essentially stricter than typical FHA/ Conventional forward mortgage guidelines.

Are monthly payments ever required on a reverse mortgage? Not principal and interest, just taxes, insurance, maintenance and other normal property-related charges. Principal and interest do accrue, but no payment is required. 

      By comparison, forward mortgages and HELOCS (Home Equity Lines of Credit) do require monthly payments.  Additionally, most HELOC's are recourse loans; Notably, reverse loans are non-recourse. A non-recourse loan is a type of loan where the borrower is not personally liable for repayment beyond the collateral securing the loan. In other words, if the borrower defaults on a non-recourse loan, the lender's recourse is limited to seizing the collateral specified in the loan agreement. The lender cannot pursue the borrower's other assets or income to satisfy the debt.

Can I sell my home once I have a reverse mortgage? Yes... The home is still yours. Lenders  fund a highly-secured and well-insured loan and then wait for repayment instead of receiving it in the form of monthly payments.  This is a good deal for lenders who routinely write loans involving much more risk. 

How do reverse mortgage loans work? A borrower qualifies and then gains access to a percentage of the equity in his or her home (this is based upon age, interest rate, and home value). Lenders are then authorized to release a percentage of an amount called the PL or principal limit. One year later the the remaining PL can be released  No interest is charged on any unused principal limit.

     The reverse loan is repaid when the borrower(s) no longer lives in the home, sells the home or passes away. Heirs will inherit the remaining equity but are not responsible for mortgage debt on the home in the case of a shortfall (the non-recourse loan). The bank does not own the home... the borrower does. The heirs inherit, they can then buy the property, sell it or sign it over to the bank.

The myth about reverse mortgages being 'easy' to get is just that, a myth. Reverse mortgages are now highly regulated, require independent counseling, and are no longer just 'the loan of last resort'. More on Reverse for Investors and Reverse for Purchase later. Reverse mortgages are not easy/ not hard to secure but securing one is a detailed process. The benefits and flexibility that they offer are remarkable.

*Jumbo/conventional reverse mortgages are available for qualified borrowers in specific states (California, yes) 55 or older. These 'Jumbo' or 'Proprietary' loans are not HUD insured, have higher interest rates and lower fees, as well as an entirely different set of guidelines than HUD’s HECM (Home Equity Conversion Mortgage) loan.

Dan DeVere is a mortgage lender in the State of California NMLS 295207   661-400-5040