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There is a popular misconception about reverse mortgage loans. Many people think that because it does not require a minimum income or credit score to qualify, they can never be denied.
In reality, you can be denied a reverse mortgage loan. Over the years, there have been some surveys with reports of racial bias in mortgage lending.
Although this is one of the factors that an applicant cannot influence, many can be worked on to increase the chance of approval.
How to calculate reverse mortgage loan
The initial principal limit denotes the total amount a borrower can access based on the value of their property.
A reverse mortgage calculator in determining the eligible amount a borrower qualifies for may consider certain conditions like age; interest rate. location and outstanding from other loans with the house as collateral.
Typically, people who qualify for a reverse mortgage (mandatory aged 62 and above) can get up to 60% of their initial principal limit in the first year.
Factors contributing to reverse mortgage loan denial
There is a growth in demand for a reverse mortgage. This was not the case a decade ago. Demand was reported to have risen from 0.2% in 2001 to 2.1% in 2011 alone.
In 2013, the Federal Housing Administration (FDA), the insurer of reverse mortgages through its Home Equity Conversion Mortgage program (HECM), was approved to alter the requirements for eligibility. The changes came into effect in 2015, making approval stricter than ever.
People are denied the loan due to one or more of the following reasons;
Underaged
Anyone applying for a reverse mortgage loan must be at least 62 years old.
If you have not attained this age, consider applying for other loans such as home equity loans that permit the usage of your house as collateral.
Less than 50 percent equity
Applicants are expected to own at least 50 percent equity in the house they are using as collateral. They must also be living on the property.
Their existence is the security for the loan term validity. If the borrower moves out of a property or dies, the lender can sell the property to recover the loan.
In cases when the property value at the time of sale does not suffice for the borrowed amount, FHA being the insurer, will cover the deficiency.
Lack of counseling session
To ensure borrowers fully understand the pros and cons of the reverse mortgage, they are required to complete a HECM counseling session. They must do this with a counselor well-versed with reverse mortgages and who has the approval of HUD, or the Department of Housing and Urban Development in the U.S.
The training is usually around $120, while there are some non-governmental organizations (NGOs) offering the service for free.
Inability to pay up-front mortgage insurance
Application for a reverse mortgage is not, in its entirety, free. For one, lenders will demand an origination fee to process the application.
In addition to that, you will be required to pay an up-front mortgage insurance premium. It is usually about 1.75% of the loan. This can be deducted from the loan itself when finally approved.
Outstanding loan
Borrowers with outstanding debt on their homes may be disqualified. Meanwhile, the type of debt used in funding the home does not affect borrowers’ eligibility so long as the debt is almost paid off, and better if it is completely settled at the time of application.
It is also important to note that the loan is not available for investment properties.
Condition of the property
This factor is not part of the mandatory requirement listed by the FDA, but lenders take it seriously in their evaluation.
Your property must be in good condition. To get some lenders’ approval, you may need to perform some repairs on the house.
Tax Default
Tax payment is not one of the requirements listed by the FDA for obtaining a reverse mortgage but being in the good book boosts your chance of approval.
If you default on your property taxes after approval, the lender will be forced to demand payment for the loan.
Most of the time, the house would be sold to repay the debt.
Things to consider before taking a reverse mortgage
Age
Do not take a reverse mortgage loan too early into your retirement to avoid running out of money when you are older.
Primary residence
Be certain the property will be your primary residence until death. Moving out anytime may force the lender to sell the house.
Spouse and Children
Discuss your decision with your spouse and children. This is essential if your spouse is not a co-borrower. Your partner can be evicted when you die.
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