Reverse Mortgages for Two-Family Houses

A reverse mortgage is a special type of lending arrangement for homeowners age 62 or older. Homeowners can draw from their home equity, without having to make any monthly payments as they would with a traditional home equity loan or a home equity line of credit. A reverse mortgage may be an option if you own a single-family home or a multifamily home when certain requirements are met.

How a Reverse Mortgage Works

A reverse mortgage is not a traditional loan, per se. When a borrower gets a reverse mortgage, they convert the equity in their home into regular cash flow. They receive monthly payments, which can be used to fund living expenses, healthcare, or other costs in retirement. The homeowner must meet certain requirements, including:

• Using the home as their primary residence
• Paying property taxes and insurance
• Maintaining the home

During the borrower’s lifetime, they pay nothing back against the equity that they’ve borrowed as long as they’re living in the home. Interest and fees accumulate on the balance. Once the borrower no longer lives in the home—for example, because they’ve sold it, moved to a nursing facility, or passed away—the borrowed amount is repayable in full.

This differs from a regular home equity loan or home equity line of credit (HELOC). With those types of loans, the home serves as collateral. Borrowers can take out equity up to the maximum amount allowed by the lender. The money is repaid over time, with interest, and there are no age restrictions. If the borrower fails to repay a home equity loan or a HELOC, the lender can initiate foreclosure proceedings to take ownership of the property.

Reverse Mortgage and Two-Family Houses

Certain requirements must be met for someone to take out a reverse mortgage. Generally, if you’re getting a Federal Housing Administration (FHA) reverse mortgage, also known as a home equity conversion mortgage (HECM), you must:

• Be age 62 or older
• Own the property outright or have paid down most of the mortgage because lenders generally require at least 50% equity in the home
• Live in the property as a principal residence
• Not be delinquent on federal debt, including tax debt and student loans
• Have resources to pay property taxes, insurance, and maintenance
• Attend a U.S. Department of Housing and Urban Development (HUD)-approved reverse mortgage information session

There are also guidelines for the types of property that are eligible for a reverse mortgage. Allowed property types include single-family homes and two- to four-unit homes.

This means that it’s possible to take out a reverse mortgage if you own a two-family home, assuming that all of the other conditions are met. For example, you might be a widow living with your adult daughter, her spouse, and their children. As long as you own the home outright or nearly so and use it as your principal residence, you could qualify for a reverse mortgage.

Who Repays a Reverse Mortgage on a Two-Family Home?

During your lifetime, you typically pay nothing toward a reverse mortgage as long as you live in the home. However, the money that you borrowed against your equity must be repaid eventually. If you’re living in a two-family house, who pays can depend on who else’s name is on the reverse mortgage and who’s living in the home at the time.

If you’re co-borrowing an HECM with a spouse, an adult child, or someone else, that person can remain in the home—even if you move out or pass away—without having to pay anything toward the loan. Your spouse also may be able to stay in the home without having to pay off the loan balance if you pass away or move to nursing care, even if they’re not listed as a co-borrower. But they have to continue living in the home as their principal residence.

Anyone who is not a co-borrower on the reverse mortgage—such as a child, a dependent, another relative, or a spouse who doesn’t qualify as an eligible non-borrowing spouse—will have to pay off the loan balance if they want to stay in the home. If they’re unable to come up with the money to pay off the reverse mortgage, then they’ll have to sell the home.

The Bottom Line

Reverse mortgages can provide a supplemental stream of income in retirement for homeowners who have accumulated a sizable amount of equity. If you’re living in a two-family home, it’s important to understand when you can and can’t get a reverse mortgage, as well as who is responsible for repaying it. It’s also helpful to compare different reverse mortgage options to find the one that has the most favorable terms for your situation.