What Disqualifies You From Getting a Reverse Mortgage?

Key Points

• You might be disqualified from getting a reverse mortgage if you don’t meet age requirements, are behind on other loans and payments, or don’t have enough equity in the home.
• Homes must meet the Department of Housing and Urban Development (HUD) and Federal Housing Administration (FHA) requirements while also serving as your primary residence or you might be denied a reverse mortgage.
• Applicants with poor credit, insufficient income to care for the home and pay property taxes or who have not completed a counseling session will often receive a denial.

If money is tight and you’re looking for options for added income, you might start wondering what disqualifies you from getting a reverse mortgage. You’ll need to meet several criteria or your application will be denied. Those criteria include being age 62 or older, having at least 50% equity in your home, and having enough income or assets to pay the property taxes and homeowners insurance. Let’s dive deeper into items that could disqualify you from getting a reverse mortgage and the alternatives available in case you are disqualified. 

Reasons You May Be Disqualified From Getting a Reverse Mortgage

As reverse mortgages have grown in popularity, the qualification criteria have tightened somewhat. In 2015, FHA modified the rules, allowing lenders to complete a full financial assessment before granting funds to the borrower. That financial assessment has made it more challenging to qualify for the loan because the approvals are more strict. Review these reasons you might be disqualified from getting a reverse mortgage.

Under the Age of 62

Borrowers who are less than 62 years of age will not qualify for traditional reverse mortgage products, though some banks have proprietary products that can help. The loan is designed to help supplement income for retirees while allowing them to stay in their homes that they know and are comfortable in. So if you haven’t reached age 62 yet, a home equity line of credit might be a better fit.

Lack of Complete Ownership of the Property

If your home does not meet the eligibility requirements, you can be denied the loan. You’ll need to own a single-family home, a multiunit home where you occupy one unit, a condo project that meets HUD requirements or FHA requirements, or a manufactured home that meets FHA requirements. If you don’t have complete ownership of the property, such as in the case of a co-applicant not included on the reverse mortgage application, your application will be denied.

Your Home Is Not Your Primary Residence 

To pull equity from the home, it must be your primary residence. This means that you can’t apply for a reverse mortgage on a vacation home or a property where you only spend a small percentage of the year. You must live there the majority of the year to qualify for a reverse mortgage.

Bad Credit History

During the financial assessment, the lender will evaluate your credit report and look at how you’ve paid your debts previously. If you have missed payments and delinquent debts, you might receive a loan denial. Or if your debts consume too much of your income, the lender might find that you don’t have sufficient funds to complete the upkeep of the house and deny you the loan.

Too Little Equity 

You can’t have loans on the home that exceed 50% of its value. In that case, you wouldn’t have enough equity to pull from the home for a reverse mortgage. Evaluate your home’s value and what you still owe on the home to calculate the equity you’ve built in it.

Property Is in Poor Condition

You must maintain your home to qualify for a reverse mortgage. During the application process, the lender will complete an appraisal to evaluate the home’s fair market value. They’ll be looking at the roof, HVAC, electrical, plumbing, windows and more. They want to know that the home is sound and the roof won’t leak and destroy everything or that a plumbing leak won’t lead to massive repairs that reduce the value of the home that is the collateral for your reverse mortgage loan.

If you are denied a reverse mortgage due to an area of the home being faulty, you can fix it up and apply again to prove that the home meets HUD requirements for health and safety.

Failing to Meet Financial Assessment Requirements

Part of the reverse mortgage application process is completing a financial assessment with the lender. The lender will evaluate your income and assets to evaluate your ability to keep up with home maintenance, property taxes and homeowners insurance. 

If you have inadequate income from your job, Social Security, 401(k) disbursements, pensions, rental income, investments or other sources, you won’t receive approval for the loan. 

Behind on Property Taxes or Homeowners Insurance

If you have delinquent property taxes, the lender might not grant you the loan. While you could use the loan to get current on your taxes, it signals to the lender that you don’t have sufficient funds to cover the taxes on an ongoing basis, which could lead to foreclosure. Staying current with homeowners insurance also protects the lender’s collateral for the loan in case anything serious happens to it, which is why they want to see that you’re making your premium payments.

Delinquent Federal Debts  

You won’t qualify for a reverse mortgage if you are behind on payments for federal loans, such as federal student loans or income taxes. Proving that you’ll use the reverse mortgage proceeds to pay off these debts might still allow you to qualify for the loan.

You Have Yet to Finish a Counseling Session

All reverse mortgage borrowers must complete a counseling session with a HUD-approved counselor. During this session, you’ll learn the pros and cons of reverse mortgages and more about how they work. That way, you know your disbursement options and alternative loans that might be a better fit for your situation. Failing to complete the counseling session could be a reason you receive a denial from your application. 

What if You Don’t Qualify for a Reverse Mortgage?

If you don’t qualify for a reverse mortgage with your first application, you have a few options. The first option is to wait. Giving it time until both applicants are age 62 or older or until you can get current on tax payments and homeowners insurance and fix up the house if the assessment shows it needs major repairs can all lead to approval later.

In the case of bad credit, spend some time working on your credit, either on your own or with a credit repair service. Work toward building more equity in the home by paying down your mortgage if you can.

Another option is to downsize your home. This allows you to reduce your monthly payments related to maintenance, energy, insurance and property taxes and might even mean you no longer have a mortgage payment. While letting go of your home might be disappointing, a downsize can help you purchase a property that is easier to maintain long-term and ensure you keep the equity you’ve built up in your home to pass to your heirs or ensure you can live there throughout retirement.

If waiting or downsizing are not of interest to you, consider one of these reverse mortgage alternatives.

Cash-Out Refinancing

Another way of accessing your home’s equity is through a cash-out refinancing. In this case, you’ll be taking on a new mortgage that is larger than your current one. For example, if you own a $500,000 home and currently owe $80,000 on it, you can increase the mortgage loan to $400,000. In this scenario, you would receive $320,000 at closing.

The catch with this is that you’ll need to be able to make the ongoing mortgage payments on the larger loan. Additionally, you’ll be subject to today’s mortgage terms, which might mean a higher interest rate than what you were paying. 

Home Equity Loan 

You can get a lump sum from your home’s equity with a home-equity loan. You’ll essentially be taking out a second mortgage on the home and using the home as the collateral. These loans often have a fixed interest rate with a fixed payment you’ll need to make each month. These loans often have a 30-year term.

Home Equity Line of Credit (HELOC)

When you fail to get a reverse mortgage, you might consider a home equity line of credit. The line of credit is determined using a portion of your home’s equity up to 85% less any outstanding loans on the home. During the draw period, which is often 10 years, you’ll only pay interest on the loan. At the end of the 10 years, you’ll start repaying the loan with principal and interest. These loans come with variable rates, which can be challenging when you’re on a fixed income during retirement. 

Review Requirements Before Applying for a Reverse Mortgage

Before applying for a reverse mortgage, review the lending requirements so you don’t get any surprises at the end of the application process. Make sure your affairs are in order before completing your application for best results.

Frequently Asked Questions