You may not qualify for a reverse mortgage if you have bad credit, lack sufficient income, do not meet the age requirements or have missed tax or insurance payments.
Many seniors use a reverse mortgage to cover expenses during retirement, but like any financial product it has some strict eligibility requirements. That’s why knowing what disqualifies you from getting a reverse mortgage is important before applying for one. On top of being at least 62 years old you’ll also need at least 50% equity in the house, have a good credit history and be able to afford tax and insurance payments on the property. Even if you don’t qualify for a reverse mortgage right now, there are steps you can take to fix those issues and receive approval later on.
Here, we’ll dive deeper into the factors that could prevent you from getting a reverse mortgage, what you can do to fix them and give you some tips on the application process.
What is a Reverse Mortgage?
A reverse mortgage is a financial product that allows homeowners 62 years or older to receive money in exchange for a significant chunk of their home’s equity. According to the Internal Revenue Service, the money can be received in monthly installments or as a lump sum and is not subject to taxation.
The homeowner isn’t required to pay until they leave the property or die.
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How Does a Reverse Mortgage Work?
As the name suggests, a reverse mortgage is the opposite of a conventional home loan. Instead of making payments to increase your home equity, you’re giving up equity in exchange for monthly payments or a lump sum. The amount of equity you have will determine the amount of money you’re eligible to receive.
What Disqualifies You From Getting a Reverse Mortgage?
Here are the most common reasons people don’t qualify for a reverse mortgage, as told by home loan experts.
Under the Age of 62
“The first and most basic disqualifier is age,” says Ali Zane, CEO and credit consultant at Imax Credit Repair Firm. “If you're not at least 62, you’re out of the running.”
While borrowers younger than 62 won’t qualify for traditional reverse mortgages, some banks have proprietary products that can help, such as a home equity line of credit or a HELOC. Both are a type of home equity loan that can help supplement income for retirees while allowing them to stay in their homes that they know and are comfortable in.
Your Home Is Not Your Primary Residence
To pull equity from the home, it must be your primary residence. This means you can’t apply for a reverse mortgage on a vacation home or a property where you only spend a small percentage of the year.
Bad Credit History
Missed payments or delinquent debts that show up on a credit report may prevent you from being approved for a reverse mortgage. Lenders may also deny your application if your debts consume too much of your income, so be sure you have a debt-to-income ratio below 43%.
Not Enough Equity
In most cases, you’ll need at least 50% equity in the home to be approved for a reverse mortgage. To calculate home equity, subtract the remaining loan balance from the home’s market value.
“Reverse mortgages are based on the value of your home, so if you still owe a large portion of your mortgage, the deal may not make sense for the lender,” Zane says.
Property Is in Poor Condition
You must maintain your home to qualify for a reverse mortgage. The lender will complete an appraisal during the application process to evaluate the home’s fair market value. They’ll examine the roof, HVAC, electrical, plumbing and windows.
They want to know that the home is sound and the roof won’t leak and destroy everything or that a plumbing leak won’t lead to massive repairs that reduce the home's value that is the collateral for your reverse mortgage loan.
“Something as simple as an outdated roof or missing handrails can cause trouble,” Zane adds.
Failing to Meet Financial Assessment Requirements
Part of the reverse mortgage application process is completing a financial assessment with the lender. The lender will evaluate your income and assets to evaluate your ability to keep up with home maintenance, property taxes and homeowners insurance.
If you have inadequate income from your job, Social Security, 401(k) disbursements, pensions, rental income, investments or other sources, you won’t receive approval for the loan.
Behind on Property Taxes or Homeowners Insurance
The lender might not grant you the loan if you have delinquent property taxes. While you could use the loan to get current on your taxes, it signals to the lender that you don’t have sufficient funds to cover the taxes on an ongoing basis, which could lead to foreclosure.
Staying current with homeowners insurance also protects the lender’s collateral for the loan in case anything serious happens to it, which is why they want to see that you’re making your premium payments.
Delinquent Federal Debts
You won’t qualify for a reverse mortgage if you are behind on any federal payments, such as federal student loans or income taxes. Proving that you’ll use the reverse mortgage proceeds to pay off these debts might still allow you to qualify for the loan.
You Have Yet to Finish a Counseling Session
All reverse mortgage borrowers must complete a counseling session with a Department of Housing and Urban Development-approved counselor. During this session, you’ll learn the pros and cons of reverse mortgages and more about how they work. That way, you know your disbursement options and alternative loans that might better fit your situation. Failing to complete the counseling session could be why you receive a denial from your application.
Do I Qualify for a Reverse Mortgage?
- You might be disqualified from getting a reverse mortgage if you don’t meet age requirements, are behind on other loans and payments or don’t have enough equity in the home.
- Homes must meet the Department of Housing and Urban Development (HUD) and Federal Housing Administration (FHA) requirements while also serving as your primary residence
- Applicants with poor credit, insufficient income to care for the home and pay property taxes or who have not completed a counseling session may be denied for a reverse mortgage
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Ali Zane, CEO and credit consultant at Imax Credit Repair Firm.
Frequently Asked Questions
What are three major requirements to qualify for a reverse mortgage?
The three major requirement to qualify for a reverse mortgage are that your must be 62 years or older, have at least 50% equity in the house and it must be your primary residence. Other qualifications include not being behind on federal debts and the property being in decent condition.
Why would you be turned down for a reverse mortgage?
Reasons for being turned down for a reverse mortgage include not meeting the age requirement (62), being delinquent on federal debts and not having enough home equity. You could also be denied if the house requires extensive renovations.
What is the 60% rule in reverse mortgage?
The 60% rule for reverse mortgages states that the homeowner’s initial loan must be capped at 60% of the home’s appraised value. So a home valued at $500,000 would garner a $300,000 reverse mortgage.
Sources
- Ali Zane, CEO and credit consultant at Imax Credit Repair Firm
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.
