One of the most common questions among homeowners age 62 and over who have decided to tap into some of their home equity is, “What percentage of home value can you get with a reverse mortgage?” A number of factors are used to determine a homeowner’s reverse mortgage loan to value ratio, also referred to as LTV. If you’re considering this type of loan, a reverse mortgage counselor will be able to tell you how much you can borrow.
Who’s Eligible for a Reverse Mortgage?
Seniors who have paid off their mortgage or a big part of it may be eligible for home equity conversion mortgages backed by the Federal Housing Administration. Reverse mortgages are marketed to older homeowners who worry about running out of money during retirement or who want to finance a more comfortable lifestyle. The loan does not have to be repaid until the home is sold or the homeowner dies.
There are several requirements for HECM borrowers:
- Must be age 62 or older
- Must occupy the property as a principal residence
- Must own the property or have considerable equity in it
- Must have no delinquent federal loans
- Must have the ability to make all payments related to the property, including taxes, homeowners insurance and HOA fees
In addition to meeting these requirements, borrowers must meet with a certified HECM counselor to learn details about obtaining a reverse mortgage and terms for repayment.
Reverse Mortgage LTV
Federal rules prohibit borrowers from taking out 100 percent of their home’s value with a reverse mortgage. Loans that are too close to the home’s value will surpass the value of the home over time when interest is compounded. For a reverse mortgage, the LTV ratio depends on the exact age of the borrower, the value of the home and current interest rates.
The FHA set the maximum property value for HECM loans at $726,525 for 2019. This is up from $679,650 reverse mortgage loan limits in 2018. Homeowners who want larger reverse mortgages may be able to find private lenders offering jumbo reverse mortgages, though they may end up paying more than for FHA-backed loans.
Reverse Mortgage Application Process
If you are eligible for an HECM, the first step in the process is meeting with an HECM loan counselor, who will inform you about the program, verify your eligibility and provide a list of approved lenders. The counselor will also be able to calculate the percentage of your home’s value you’ll be able to borrow. From there, you can apply for a reverse mortgage with a lender on the list.
HECM loans come with several fees and charges, including a mortgage insurance premium, an origination fee and servicing fees. Some borrowers choose to deduct these from proceeds of the loan. After you take a reverse mortgage, you will still retain the title to your home. You will typically be given a choice of taking your loan as a lump sum, in monthly payments or as a line of credit that can be accessed when you please.
Downside of a Reverse Mortgage
Although a reverse mortgage can be a useful option for some homeowners, there are some negatives. Unlike a regular mortgage, where the interest and principal are paid down each month, a reverse mortgage grows each month as interest is added. If the home must be sold, the reverse mortgage must be paid back within one year.
If a homeowner doesn’t make insurance and property tax payments on time, a reverse mortgage is considered to be in default and foreclosure on the home could follow. Even if payments are made on time, the home may need to be sold after the homeowner passes away to pay back the reverse mortgage. This could be inconvenient if family members are still living in the home.
- HUD.gov: Home Equity Conversion Mortgages for Seniors
- HUD.gov: Howe the HECM Program Works
- Business Insider: Taking Out a Reverse Mortgage is Almost Never a Good Idea — Here's Why
- NRMLA: What Do I Do When My Mortgage is Due?
- Federal Trade Commission Consumer Information. "Reverse Mortgages." Accessed Mar. 10, 2020.
- National Reverse Mortgage Lenders Association. "Senior Housing Wealth Reaches Record $7.14 Trillion." Accessed Mar. 10, 2020.
- U.S. Department of Housing and Urban Development. "How the HECM Program Works." Accessed Mar. 10, 2020.
- American Advisors Group. "What is a HECM for Purchase Loan?" Accessed Mar. 10, 2020.
- Federal Deposit Insurance Corporation. "Reverse Mortgages: What Consumers and Lenders Should Know." Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau (CFPB). "What Happens to My Reverse Mortgage When I Die?" Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau (CFPB). "How Much Will a Reverse Mortgage Loan Cost?" Accessed Mar. 10, 2020.
- U.S. Department of Housing and Urban Development. "HECM Counseling Fees." Accessed Mar. 10, 2020.
- U.S. Department of Housing and Urban Development. "Home Equity Conversion Mortgage Program (HECM) Fact Sheet." Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau (CFPB). "How Much Money Can I Get With a Reverse Mortgage Loan, and What Are My Payment Options?" Accessed Mar. 10, 2020.
Catie Watson spent three decades in the corporate world before becoming a freelance writer. She has an English degree from UC Berkeley and specializes in topics related to personal finance, careers and business.