What are the basic requirements for a HECM Reverse Mortgage?
There are five basic requirements for a HECM Reverse Mortgage:
- Age – One borrower must be 62 or older
- Use – The home must be the primary residence
- Equity – There must be sufficient equity in the home
- Credit – It is preferable that credit be clean for the past two years
- Income – must show a bare minimum to cover basic expenses
The old Reverse Mortgage Program required everyone on the loan to be 62 or older. This rule caused a lot of problems because it would exclude spouses from being on the loan if they were not 62 or older. It is because of this restriction that you may have heard some negative stories about Reverse Mortgages.
If he was 62 and she was only 61, in the old days she could not be on the loan. Fast forward 20 years if he passed away first and she was not on the mortgage, she would have been forced to leave the home.
This situation created a real nightmare for a lot of people. In response FHA updated the policy to require both parties in a marriage to be on the new mortgage. So even if he’s 62 and she’s 42, she must be on the mortgage to make sure they both have the protections of the mortgage for life.
This guideline is very simple it is that if you have a Reverse Mortgage, then you must live in the home as your primary residence.
Inevitably follow up questions come with this rule. For example:
“What if we go into a care facility?” –
This is ok on a temporary basis. As long as one of the couple is still living in the home or the vacancy from the home in a care facility is temporary and expected to last less than 1 year then this is totally fine. once the vacancy becomes permanent or exceeds one year then the Reverse Mortgage would need to be paid off by selling or refinancing the home.
“Can I have renters?”
Yes, IF you also live in the home. For example if you live in the upstairs and rent out the basement this is totally acceptable with FHA. Likewise if the home is a two, three or fourplex and you lived in one of the units then this would also be allowed as long as you can call it your primary residence.
“Does that mean I have to live there 12 months of the year?” –
No, the quick answer to this is that if you live in the home for six months and one day of the year it is your primary residence. If you travel a lot or have another home in a different climate then you can go months without living in this home as long as you plan to return to it and continue using it as your primary home.
Reverse Mortgages allow the homeowner to not make mortgage payments. Because of this allowance the requirement for a hecm is that we must have an equity reserve in the home that will help prevent it from going upside down. This number varies for everyone based on the age of the youngest borrower and the current interest rates but for most people the amount of equity we need in the home ranges from 35% to 50% of the property’s appraised value.
Credit is one of the less important requirements for a hecm that we have but it is still something we have to look at. With a Reverse Mortgage you don’t have to make a mortgage payment to the bank until you leave the home but you do have to continue paying basic property expenses such as taxes, insurance, HOA dues, etc. for this reason we have to verify that your debts are paid on time.
“What if I have credit issues?” –
If you’ve had credit bumps it’s not the end of the world. We normally can still do the Reverse Mortgage but we’ll have to do one of two things:
- Document the cause of the credit issue. For example if there were unexpected medical expenses that made it difficult to pay bills on time this would be allowed.
- We could set up a LESA. A LESA is a lot like the escrow account you had on your old forward mortgage. The idea is that your lender will reserve a portion of your equity to pay the property taxes and insurance for you for the next 15-25 years.
Income requirements for a hecm is also a lesser requirement when qualifying for a Reverse Mortgage when compared to forward mortgages. With a Reverse Mortgage we must document enough income to prove your ability to pay your basic debt payments and living expenses but still have enough income left over to pay the property expenses such as taxes, insurance, hoas, etc. We don’t have to meet certain debt ratio requirements. We just have to prove you can cover all of your expenses
The market and guidelines for Reverse Mortgages continue to change at a pretty rapid pace. If you’ve tried to qualify for a Reverse Mortgage in the past but couldn’t it would be wise to have another look.
If you or someone you love would really benefit from a HECM Reverse Mortgage please give me a call. I’d love to help answer any questions.
President – Reverse Mortgage Specialist
Heritage Reverse Mortgage
Heritage NMLS #1497455 Trevor’s NMLS #: 267962
1060 South Main Street Bldg. A Suite 101B
St George Utah 84770