One of the greatest benefits of reverse mortgages--besides the fact that they provide seniors with additional cash through retirement--is that they are easy to qualify for. During retirement, many seniors rely on Social Security and savings to cover their expenses. With a limited income, it can be difficult to qualify for traditional home equity loans. These loans were originally designed to be available to seniors of all income levels, as long as they have enough equity in their home.
What Reverse Mortgage Lenders Are Currently Looking for in Borrowers
The current requirements for a reverse mortgage are fairly straightforward. Lenders are looking for borrowers who are at least 62 years old, own their home, and have accumulated a substantial amount of equity in their home. The specific amount of equity borrowers need will depend on their age. However, to qualify, borrowers must have enough equity to repay their original mortgage loan with the proceeds of their new loan.
Reverse mortgage lenders are also looking for certain property types. To qualify for a loan, borrowers must own and reside in a single family home, two to four unit property, FHA-approved condominium, or an FHA-approved manufactured home. People who meet these requirements will typically qualify for a loan.
How Qualifications May Change in the Upcoming Year
While most lenders currently offer lenient eligibility requirements, these requirements will be changing very soon. Last October, the National Reverse mortgage lenders Lenders Association (NRMLA) encouraged reverse mortgage lenders to begin evaluating potential borrowers more carefully. Instead of approving seniors based on age and equity, NRMLA suggested that lenders also consider borrowers' income.
By evaluating borrowers' income, lenders would be more able to determine which borrowers could afford to maintain their loan. To keep the loan in good standing, borrowers are required to maintain the condition of their home, have homeowners insurance, and pay their property taxes. Borrowers that fail to do so will be forced to repay their loan early or face losing their home.
In mid-2012, the Department of Housing and Urban Development (HUD) is expected to release new underwriting guidelines. Instead of having the option to follow NRMLA's suggestions on how to underwrite loans, reverse mortgage lenders will be required to evaluate borrower's based on income. These new guidelines might also impose credit requirements on future borrowers. By imposing these guidelines, HUD is hoping to reduce the number of borrowers who end up defaulting on their loans.
In all probability, HUD's new guidelines will not be overly strict. These loans were originally designed to help senior homeowners, and they will continue to do so in the future. Still, these new guidelines might disqualify some seniors, especially those surviving on a limited income. To avoid being subject to additional underwriting, on-the-fence seniors will need to act soon. In the next few months, reverse mortgage lenders will no longer be approving borrowers based on their age, equity, and property type alone.