How Much Equity Do You Need for a Reverse Mortgage?

If your budget in your retirement years feels a little tight, a reverse mortgage may be a viable option to add cash flow to your balance sheet. But are reverse mortgages available to everyone? Not necessarily. One of the most significant determining factors of your eligibility for a reverse mortgage is the amount of equity in your home. Do you have enough equity to borrow against?

How a Reverse Mortgage Works

A reverse mortgage is a mortgage that allows homeowners over the age of 62 to borrow money by using the equity in their primary residences as collateral. Instead of paying money to the bank to slowly take complete ownership of the house, the lender pays you in monthly installments, a lump sum, or a line of credit. The reverse mortgage is paid when you sell the home or pass away and your heirs sell the house.

There are three different types of reverse mortgages:

• Home equity conversion mortgages (HECMs) are insured by the Federal Housing Administration (FHA) and require mortgage counseling.
• Proprietary reverse mortgages are offered by private lenders. They lack the regulation of an HECM but provide more options for those with high-value homes.
• Single-purpose reverse mortgages are typically offered by state and local governments or nonprofits to low-income homeowners who need to pay for home repairs or property taxes.

HECMs are the most common type of reverse mortgages, with the most definable standards. We’ll discuss how much equity you need for an HECM here.

Finding Your Equity

Since reverse mortgages borrow against the equity that you’ve built in your home, you must know how much equity you have. Part of the application process for an HECM is an appraisal to find your home’s current worth.

Once the house’s market value is determined, it’s easier to see how much equity you have. This is an easy answer for homeowners who own their homes outright: They have 100% equity. If you’re still paying on a mortgage, it will be less than that.

Variable Equity Standards

Unfortunately, there is a little ambiguity around how much equity is required to qualify for an HECM. An oft-cited standard rule of thumb is that you need 50% equity in your home to qualify. However, the U.S. Department of Housing and Urban Development (HUD) is less clear in its requirements.

According to HUD, homeowners must own the home outright or have paid down a “considerable amount.” With that wiggle room, the amount of equity is only one portion of the qualifying stipulations for approval, with the borrower’s age and record of financial responsibility also weighing in.

While no easily accessible rubric for how these factors affect approval is available, FHA-approved lenders consider them all when determining the amount of money that you can access. Regardless of equity, HUD caps the amount of money that anyone can borrow at $970,800 for 2022.

The Bottom Line

Having equity in your home is a valuable asset in your retirement years, especially if you’re interested in a reverse mortgage. Since reverse mortgages are only available to seniors, there is an expectation of significant equity built up. If you purchased your home more recently and don’t have sufficient equity built up, other tools, such as a home equity line of credit (HELOC), might be better.