The reverse mortgage product is like other loans in many ways. A lender extends a loan to a qualified borrower, and in the case of a reverse mortgage, the borrower is then able to draw on loan proceeds based on a set of loan terms.
Yet there are some specific rules that are particular to reverse mortgages. It’s important to explore these rules and to understand both the rules to qualify as well as the rules that all borrowers need to follow post-closing.
In this article, you will learn:
- Qualifications that borrowers must meet prior to getting a reverse mortgage
- Rules that all reverse mortgage borrowers must follow post-closing
- Key differences between reverse mortgage rules and forward mortgage rules
- Where to learn more
Reverse mortgage qualifying rules
Age: While age requirements vary by loan program, all reverse mortgage borrowers must meet an age requirement. For Home Equity Conversion Mortgage (HECM) loans, the borrower must be at least 62 years old. For married couples, the older of the two borrowers must be at least 62. For private loan programs, age requirements may vary, with some age minimums extending to borrowers who are age 55 and up.
Home equity: To qualify, borrowers must have enough home equity to draw on via the proceeds of the loan. This amount varies depending on the home value and the borrower’s age.
Home ownership: The reverse mortgage borrower must be the homeowner and must maintain the home as his or her principal residence (he or she must live in the home at least six months out of the year).
Counseling: All HECM borrowers must go through HUD-approved reverse mortgage counseling. This counseling must be completed prior to completing a reverse mortgage application. Most private reverse mortgages also require this counseling.
Other rules: Borrowers may not be delinquent on federal debt and must undergo a financial assessment that determines whether the borrower can meet ongoing property charges associated with the loan such as timely payment of property tax and homeowners’ insurance.
Rules that borrowers must follow post-closing
Once a borrower closes on a reverse mortgage, there are some important rules that must be followed to keep the loan current and adhere to its terms. Regardless of the loan type — HECM or jumbo reverse mortgage — the borrower must keep up with these rules.
Property tax requirement: Even after the reverse mortgage is closed and the borrower no longer must make monthly mortgage payments toward principal and interest, he or she must continue to maintain property tax payments as long as the loan is in place. This is a critical reverse mortgage rule.
Homeowners insurance: After the reverse mortgage is in place, homeowners must maintain an active homeowner’s insurance policy.
Maintenance of the home: All HECM reverse mortgage borrowers must maintain their homes to FHA standards. Private reverse mortgages may have similar requirements based on their individual lender standards.
Key differences between reverse mortgage rules and forward mortgage rules
In many ways, reverse mortgage rules are like forward mortgage rules. However, in addition to the rules above that apply to reverse mortgage borrowers, there are some other key distinctions.
- Reverse mortgage borrowers receive payments on an established schedule or term. While forward mortgage borrowers make payments toward the principal and interest on their loans, reverse mortgage borrowers receive loan proceeds in the form of a lump sum, line of credit, or term or tenure payments.
- Financial requirements. Reverse mortgage borrowers are subject to a financial assessment. Forward borrowers may be subject to an assessment by their lender, which might include a minimum credit requirement and an income qualification. In contrast, the reverse mortgage financial assessment is designed to assess whether the borrower will be able to meet his or her loan obligations after the loan is closed. The assessment may find the need for a “set aside” amount that will help ensure the borrower can continue to meet the obligations of the loan.
- Reverse mortgage counseling is a requirement for all borrowers, whereas forward borrowers do not have to go through any such counseling.
- The end of the loan. In a forward mortgage, the borrower makes payments toward principal and interest over a set period of time. When those payments have been completed, the loan term is over. In contrast, a reverse mortgage does not have a set end date. Rather, the loan term ends when the borrower passes away or moves away from the home permanently.
- Home equity. The biggest difference between a reverse mortgage and a forward mortgage is that in a reverse mortgage the borrower draws down against his or her home equity, whereas in a forward mortgage, the borrower pays toward building home equity. It is important to note that reverse mortgage borrowers are not required to do so, but they may make optional payments if they so choose, which can help maintain a higher level of home equity over time.
Where to learn more
The Department of Housing and Urban Development (HUD), which administers the HECM program, provides resources and the latest information about reverse mortgage rules under the HECM program. It is always a good idea to compare reverse mortgage providers about any lender-specific rules that may exist in the case of a private reverse mortgage loan.