A reverse mortgage can be a great financial tool, and most seniors could benefit from these innovative home equity loans. But they aren’t right for everyone. Here are some common reasons why a reverse mortgage may not be the right option for you and some possibilities for making it work.
You Can’t Afford It
A reverse mortgage is often incorrectly labeled as a loan of last resort. While a reverse mortgage can help people improve their financial situations by removing required monthly mortgage payments and allowing borrowers to tap equity, you do need some level of financial stability to qualify for one. You must be able to demonstrate an ability to pay property taxes, home insurance, and any dues or fees associated with homeownership, like homeowner’s association dues. In addition, you will need to keep your home in satisfactory condition, which includes making any needed property repairs. During the financial assessment and third-party counseling (two of the requirements for getting a reverse mortgage), the lender will evaluate whether you can afford these costs.
What to Do if You Can’t Cover Your Home Expenses
Some borrowers who do not pass the financial assessment may be able to take a reverse mortgage with a LESA (Life Expectancy Set Aside). This special account holds some of the mortgage proceeds to cover insurance and taxes.
You Don’t Have Enough Equity
To qualify for a reverse mortgage, you must have at least 50% equity in your home. Other factors like your age, interest rates, the appraisal value of the home, and what payment plan you choose to determine how much you can borrow; however, there must be sufficient equity in your home to receive worthwhile loan proceeds.
What to Do if You Don’t Have Enough Equity
Take steps to increase your home’s equity by making additional payments on your current mortgage, waiting for the home’s market value to increase, or making home improvements that will increase the home’s appraisal value.
You Aren’t Old Enough
For a home equity conversion mortgage (HECM), the most popular option for a reverse mortgage, the minimum age is 62 years or older.
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What to Do if You Aren’t Old Enough for a HECM
If you don’t meet the HECM age requirement, there is another reverse mortgage option available in some states called a proprietary loan. The qualifying age limit for this type of reverse mortgage can be as low as 55 through a private lender. If you are still too young to qualify, wait a few years and build your equity so you will qualify when you age in.
You Plan to Move in the Near Future
If you’re planning on moving from home in the near future, a reverse mortgage may not be a financially smart option. To qualify for a reverse, your home must be your primary residence, and once you move out of the home, the loan balance—principal and interest— will come due. If you plan to move in the next few years, you will need to pay off the loan amount when you vacate the property. You will pay upfront fees to take a reverse mortgage, and it makes sense to stay in the mortgage long enough to make that investment worth your while.
What to Do if You Are Planning to Move Soon
If you like the idea of a reverse mortgage, but don’t intend to stay in your home for more than a few years, look into a HECM or proprietary reverse for purchase. These loans require that you put down a sizeable contribution toward the purchase of the home, but offer the benefits of a reverse mortgage.
You Want to Pass Down Your Home Free and Clear
If your home is more than just an asset and, in addition to emotional and sentimental value, you want your heirs to get the full value of your equity, a reverse mortgage may not be the best choice for you. Once the last borrower dies, the heirs will have the choice of keeping the home or selling it. Either way, only the value of the home at the time of sale will be used to pay off any loan balance. As a non-recourse loan, the payback amount will not be more than the market value of the home. If the heirs want to keep the home in the family, they have the option of taking it on for only 95% of the home’s value.
What to Do if You Want to Pass Your Home On
Talk to your heirs and make sure you are on the same page. Perhaps they don’t wish to keep your home. Or, perhaps, they have some thoughts about ways that they could pay back the loan by taking a new mortgage or from another source. A financial advisor can also help you explore options.
You Rely on Medicaid or Other Need-Based Government Benefits
If you rely on need-based governmental aid, like Medicaid or supplemental security income (SSI), the reverse mortgage proceeds may impact how much you receive from these government programs. To be eligible for need-based aid, there is an asset limit that allows you to continue to qualify for this governmental payout. If the proceeds you receive push your monthly income over the limit, you could lose your government aid. It’s always best to consult with a tax advisor first to determine if using home equity will affect your aid.
What to Do if a Reverse Mortgage Will Jeopardize Need-based Government Benefits
Taking your reverse mortgage proceeds as a line of credit is one possible way to keep the balance in your bank accounts low enough to continue qualifying for your benefits. The key is understanding the limits your benefits place on individual assets and making sure the way you receive proceeds won’t disqualify you from receiving your benefits.
Other People (Besides a Spouse) Live with You
If a family member or a friend lives with you and is not an owner of the property, they will be impacted when a reverse mortgage comes due. Once the last borrower moves out for more than a year or passes away, any non-borrowers who live in the home will need to leave.
What to Do if Family Members Live With You
A spouse who does not meet the age requirement for a reverse mortgage but who was married to the borrower at the time the loan was taken and remained married until the borrower left the home has legal protections that will allow them to remain in the home.
Other family members and friends do not have the same protections. However, if the family members who live with you are of eligible age, you may consider taking the reverse mortgage together. That way, if one of you needs to vacate the property, the other can continue to live there and receive the proceeds of the reverse mortgage.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. 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.
