Retired people may find that their financial strength lies in their homes, not in their bank accounts.
A reverse mortgage is a great way to borrow funds against your property’s equity. This method can help you add to your monthly income, spend on better quality living, or even invest further. However, there are certain qualifying parameters for you to be eligible for this process.
Are you wondering how much equity you require for a reverse mortgage? Read on to find out all you need to know about equity mortgage qualifications.
How much equity is needed for a reverse mortgage?
The FHA issues the Home Equity Conversion Mortgage (HECM), which happens to be one of the most common kinds of reverse mortgages. But, there are several other single-purpose mortgages that you can find by contacting your local or state government authorities.
If you have a high-value property, you can also approach a private lender. Private lenders provide proprietary reverse mortgages for such homes. These reverse mortgage solutions do not demand firm equity requirements.
HECM requires borrowers to own the property that they are going to leverage. The ownership needs to be complete, or the mortgage debt should be paid up to a “considerable amount.”
A reverse mortgage approval process differs from person to person depending upon factors like loan type, current financial situation, age, home value, interest rates, etc. That said, you must have at least 50% or more equity in your property to qualify for a reverse mortgage.
Typically, you will have to pay off your home loan using the reverse mortgage as soon as you start receiving the payments. The more equity you own, the less owe to the mortgage.
Let’s take an example: Arthur is 70 years old. His home is worth $200,000. However, he owes $90,000 in mortgage debts. In this situation, 55% equity belongs to him, making him eligible for $20,200. (approx.)
How much will a reverse mortgage cost me?
While traditional mortgages require you to pay monthly installments, reverse mortgages don’t. Instead, the lender collects the mortgage amount only when the borrower passes away, sells the home, or moves elsewhere.
Unlike traditional mortgages, reverse mortgages can be expensive as well as confusing. There are various costs involved in a reverse mortgage. These costs include insurance premiums, closing costs, service fees, etc.
A reverse mortgage is costly and should not be taken up casually. Opt for this only if you have a significant financial backup.
Are there any other requirements for a reverse mortgage?
There are a few other requirements that you need to know before you get a reverse mortgage. Here are some standard requirements you have to meet:
- The leveraged property should be the borrower’s primary home.
- You cannot have any federal debt pending.
- Your finances should allow you to pay taxes and make other necessary payments.
- You must be 62 years old or older to qualify.
- Your property must comply with the HUD norms.
Can I still qualify if I’m low on equity?
Yes, you can still qualify if you resort to the means mentioned below. However, before you take any of these steps, please be confident in your decision.
- Access retirement savings
- Home equity loan
- Cash-out Refinance
A reverse mortgage is a great option for you if you want to liquidate your home equity. However, it does come with a lot of expenses. We recommend you take some time out to analyze reverse mortgage requirements before making a decision.
The ideal step is to ensure that the benefits you get out of a reverse mortgage are more than your home equity. This process should be an added benefit, not a burden.