Homeowners who get denied a reverse mortgage are often surprised when it happens. While the financial requirements aren’t as stringent as those for traditional mortgages, not everyone gets approved or is eligible for a reverse mortgage.
Reasons People Don’t Qualify for a Reverse Mortgage
Some reasons for not qualifying for a reverse mortgage have to do with the structure of the reverse mortgage loan, while others are more related to the potential borrower. Here are the most common reasons an applicant is denied:
- The borrower doesn’t meet the age requirement. You must be at least 62 years old to qualify for a home equity conversion mortgage (HECM)—a common type of reverse mortgage. Other types of reverse mortgages have similar age restrictions.
- The property doesn’t qualify. To qualify, a property must be the borrower’s principal residence, in good condition, and meet HUD’s property eligibility requirements, which allow, among other property types, single-family homes or a two-to-four-unit residence.
- The borrower doesn’t meet the financial requirements of the loan. Lenders can deny applications when they determine through a financial assessment that the homeowner can’t afford the property’s upkeep, taxes, and homeowner’s insurance costs. In addition, to be approved, you must be current on any federal debt or be able to pay it in full at closing with proceeds from the loan.
- The existing mortgage exceeds the borrowing limit. The amount available through the reverse mortgage has to be at least enough to pay off the current mortgage.
What to Do If You’re Denied
If you’ve been denied a reverse mortgage, you may be able to take steps to fix the problems that interfered with approval. They include:
- If you’re not yet 62, wait a few years and apply again when you are.
- When your credit history is the problem, work to improve it. A counselor at a qualified credit counseling agency can help.
- Too little equity? Increase the amount you pay in principal when making monthly mortgage payments until you reach an acceptable equity level.
- If you aren’t able to meet the financial obligations of the reverse mortgage, you may be able to get a Life Expectancy Set Aside (LESA). This is an insurance policy attached to your reverse mortgage.
Reverse Mortgage Alternatives
Keep in mind there are other financial tools you can use to access your home’s equity.
With a cash-out refinance, you borrow more than you owe on your current mortgage. It involves paying off the “old” mortgage, creating a new one, and taking the extra amount as a lump sum at closing.
A home equity loan or a second mortgage are options that let you borrow a lump sum of money that you receive when you sign the loan agreement. Consider, too, a home equity line of credit. It lets you borrow against your equity as funds are needed.
Knowing why people get denied a reverse mortgage can help you prepare to apply. Consult with a financial expert to help you with your finances as you get ready to take this next step into retirement.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.