One of the biggest questions borrowers have about reverse mortgages is how much equity they need to have in their homes to qualify.
The general answer is “50% or higher,” but this figure depends on the borrower’s age, the price of the home and the interest rate.
What's in this article?
This article will explore how much equity a borrower needs for a reverse mortgage based on other qualifying factors.
How does a reverse mortgage loan work?
A reverse mortgage pulls from the equity that a borrower has built in their home and eliminates their monthly mortgage payments.
This loan is exclusive to borrowers aged 62 and older who have been diligently paying their mortgage for many years.
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is backed by the U.S. Department of Housing and Urban Development (HUD).
Borrowers can receive the funds as a line of credit, monthly installments or a lump sum.
The loan does not have to be repaid until the borrower moves out of the home, sells the property or passes away.
The borrower also is required to continue maintaining the property and paying taxes and insurance.
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How do borrowers qualify for a reverse mortgage?
To qualify for a HECM, borrowers must meet the following requirements:
- You are 62 years of age or older
- The home is your primary residence
- The property is a single-family home, or if you live in a two-to-four-unit home you live in one unit and rent out the others
- You are financially able to continue paying property taxes, homeowners insurance premiums and maintenance costs
- You must participate in HUD-approved reverse mortgage counseling
- Your lender will verify your income, debt, assets and credit
As far as the amount of equity and how much a homeowner can borrow, HUD requirements state that the borrower must own the property outright or have paid down a considerable amount.
There is no minimum equity requirement, but lenders typically state that borrowers must have 50% or more equity in the home.
Let’s take a look at what this might mean for your unique reverse mortgage scenario.
How much equity do you need for a reverse mortgage?
HECMs require the borrower to have a significant amount of equity built in their homes to pay off the existing mortgage and successfully eliminate payments.
Generally, the more equity you have in your home and the older you are, the more funding that you’re eligible to receive.
The main factors influencing the amount of funding available to you include:
- Your age
- The amount of equity in your home
- Current interest rates
If you’re 62 years old and interest rates are high, 50% equity may not be enough to give you the funding you need.
Borrowers also must consider their reverse mortgage goals.
Is the purpose just to eliminate your monthly mortgage payments, or do you intend to leverage a line of credit for your future financial needs?
Your goals and intentions with the loan will also determine whether an HECM is right for you at this time.
An experienced reverse mortgage lender such as Compass Mortgage will be able to determine exactly how much funding you can access and help you navigate your options.
What if you dont have enough equity?
If you currently have less than 50% equity in your home, you may still be able to qualify for a reverse mortgage based on other factors such as your age and the interest rate.
If you are considering a reverse mortgage now or in the future, it’s worth it to reach out to a lender and make a plan for your future.
A reverse mortgage offers numerous benefits to the right borrower, such as:
- Supplemental income to cover living expenses, medical costs or other financial needs
- Allows you to stay in your home while eliminating your mortgage payments
- Flexible payment options
- No repayment until you move or pass away
Many senior homeowners are using reverse mortgages to supplement a fixed income in retirement.
The option is a gift for many who have diligently made their mortgage payments over the years and now can reap the rewards.
Reverse mortgage alternatives
If you can’t use a reverse mortgage to tap into your home equity now, you have alternatives.
Home equity loan or home equity line of credit
Home equity loans (HEL) and home equity lines of credit (HELOC) allow borrowers to pull equity out of their homes and use it for any purpose of their choosing.
A HEL is provided in a single, lump-sum payment that is paid back in fixed installments over a specific period.
A HELOC acts similarly to a credit card, with revolving financing that borrowers can borrow, pay back and borrow again during the draw period.
The funds can be used to help borrowers with medical bills, large expenses or debt consolidation. HELOCs are a better option for borrowers than a personal loan or credit card because interest rates are lower.
Downsize your home
Sometimes, a better alternative for borrowers 62 and older is selling their current home and purchasing a more affordable one.
By acquiring a more budget-friendly property, you can release home equity and minimize recurring expenses like property taxes and maintenance costs.
Discuss your options with Compass Mortgage
Determining whether you qualify for a reverse mortgage is difficult to do on your own.
Connect with reverse mortgage lender Compass Mortgage today to review your loan options and discover the best course of action for your unique scenario.
You may be surprised to learn that you have more funds available to you than you initially thought. And if you discover that you currently don’t have enough equity, your lender can help you navigate your next steps to secure the funding you need.
Compass Mortgage values your financing needs. Together, we’ll find the most affordable loan for your home.