I am an 85-year-old widower. I own my home, but took out a second mortgage some years ago, and now have very little equity left. I could use some extra monthly income. Can I get a reverse mortgage?
You may be able to get a reverse mortgage even if you don’t have very much equity in the home, but since you'll have to pay off any existing mortgage, it might not be worthwhile for you to do so.
Understanding Reverse Mortgages
The most widely available reverse mortgage is the FHA's Home Equity Conversion Mortgage (HECM). A reverse mortgage allows older homeowners to convert some of the equity in their home into cash in the form of a lump sum (subject to some limitations), monthly amounts, or a line of credit. (You can also get a combination of monthly installments and a line of credit.)
With a reverse mortgage, the lender makes payments to the homeowner, rather than the homeowner making payments to the lender. As a result, the homeowner’s equity in the property gets smaller over time, while the loan balance grows. If you take out a reverse mortgage, the loan doesn’t have to be paid back until you die, move, sell the home, or fail to live up to the contractual requirements of the mortgage. (Learn more about reverse mortgages in Nolo’s article Reverse Mortgages for Retirees and Seniors.)
How to Qualify for a Reverse Mortgage
In order to qualify for a HECM (the most popular type of reverse mortgage on the market) you must:
- be 62 years of age or older
- occupy the property as your principal residence
- have sufficient equity in the home
- not be delinquent on any federal debt
- have sufficient financial resources to continue to pay for ongoing property expenses (such as property taxes, homeowners insurance, HOA fees, etc.), and
- participate in a consumer information session given by a HUD-approved counselor.
(Learn more about eligibility requirements for a Home Equity Conversion Mortgages from the Federal Housing Administration’s website at www.hud.gov. Run a search for “reverse mortgage” to find links to informative articles and eligibility criteria.)
How Much Cash You Can Receive from a Reverse Mortgage
The main factors in determining how much money you will receive from a reverse mortgage are your age, current interest rates, and your home’s value. Generally speaking, the older you are and the more equity you have, the more money you can get. In some cases though, you may be able to get a reverse mortgage even if you have little equity, so long as you have sufficient equity in your home to pay off your existing mortgage.
Example. Say you owe $100,000 on an existing mortgage. Based on your age, appraised home value, and interest rates, you qualify for a reverse mortgage in the amount of $105,000. In this scenario, all but $5,000 of the money from the reverse mortgage will be used to pay off the existing mortgage.
If you have little equity in your home, this might mean that you won't get enough income from the reverse mortgage to make it worthwhile. On the other hand, it could free up money by eliminating your monthly mortgage payment. (Learn more about the upsides and downsides to reverse mortgages.)
Get More Information About Reverse Mortgages
Reverse mortgages are not always a good option for older homeowners. Before taking out a reverse mortgage, be sure to consider exploring all of the other options available to you. For example, you may qualify for a state or local program to lower your bills, you could consider downsizing to a more affordable home, or you may be able to get a loan modification to lower your current monthly mortgage payments.