Reverse mortgages provide older Americans with a way to access the equity in their homes to fund retirement, supplement their income, and cover expenses while continuing to live in their home. Unlike traditional mortgages where homeowners make payments to the lender, a reverse mortgage involves the lender making payments to the homeowner, which is why it’s called a “reverse” mortgage.

However, it’s important to understand that, despite its appearance of “free money,” a reverse mortgage is a loan that accrues interest and places a lien on your home. If you’re considering a reverse mortgage, here’s what you need to know about the requirements and implications.

What is a reverse mortgage?

Reverse mortgages are loans available to homeowners aged 62 and older, allowing them to borrow against the equity in their home (the portion they own outright) and receive the loan proceeds as ongoing tax-free payments. These payments are made by the reverse mortgage lender.

David Reyes, founder and chief investment officer at Reyes Financial Architecture in San Diego, highlights the key benefit: “A reverse mortgage can improve cash flow by eliminating monthly mortgage payments and providing access to home equity through a line of credit or a lump sum payment.”

However, the funds must be repaid when the homeowner passes away, permanently moves out of the home, or sells it.

Age requirements for a reverse mortgage

Age is a crucial factor for qualifying for a reverse mortgage. To be eligible for government-sponsored home equity conversion mortgages (HECMs) and most private reverse mortgages, you must be at least 62 years old. However, a few lenders offer reverse mortgage options for individuals as young as 55.

Financial requirements for a reverse mortgage

Reverse mortgages come with several requirements. For example, you must undergo counseling from a HUD-approved reverse mortgage counseling agency.

During this session, a counselor will assess your eligibility for the loan and discuss its financial implications. It’s important to consider that taking out a reverse mortgage too early may deplete your funds later in life, especially when income typically decreases and healthcare costs rise.

Financially, you must be current on all federal debts, such as income taxes or federal student loans. Additionally, you’ll need to either set aside some of the reverse mortgage funds at closing or have sufficient personal funds to cover ongoing expenses like property taxes and homeowners insurance.

Property requirements for a reverse mortgage

Reverse mortgages come with specific property requirements. The home in question must be your primary residence, meaning it’s where you live for most of the year. Additionally, the property must be in good condition; if it’s not, you may be required to make repairs before the reverse mortgage can be approved. Ensure you have funds available for ongoing home maintenance and repairs.

To qualify, you need to have substantial equity in your home. This means you should own a significant portion of the property outright and have most of the mortgage paid off. If you still have an outstanding mortgage balance or other home-secured debts, such as home equity loans or lines of credit (HELOCs), you will need to pay these off when closing the loan.

Alternatives to reverse mortgages for those that don’t qualify

Financial experts often advise considering reverse mortgages as a last resort due to the potential loss of home equity and the fact that not everyone qualifies for them. Instead, you might explore these alternatives:

  • Home Equity Loan: If you need a lump sum for a specific expense, a home equity loan can provide access to your home’s equity. This fixed-rate loan acts as a second mortgage and can be a cost-effective borrowing option, even for younger homeowners with sufficient equity.
  • Cash-Out Refinance: A cash-out refinance allows you to convert your home equity into cash by refinancing your entire mortgage. This option consolidates your debt into a single payment, potentially lowering your interest rate and adjusting your loan term.
  • Home Equity Line of Credit (HELOC): For flexibility, consider a HELOC. It allows you to draw funds from your home’s equity as needed, making it a suitable choice for covering ongoing expenses without taking on a fixed monthly loan payment.