What Type of Home Is Not Eligible for a Reverse Mortgage?
Learn why certain homes don't meet reverse mortgage requirements. Understand the nuanced criteria that can affect your property's eligibility.
A reverse mortgage allows homeowners aged 62 or older to convert home equity into cash without selling their property or making monthly mortgage payments. This tool offers flexibility in retirement, helping supplement income, cover expenses, or manage debt. However, not all homes or circumstances qualify. Understanding the specific criteria for ineligibility is important for homeowners considering a reverse mortgage, especially the widely used Home Equity Conversion Mortgage (HECM) program, insured by the Federal Housing Administration (FHA). This article clarifies the types of homes and situations that do not meet eligibility standards.
Ineligible Residential Property Types
Certain property characteristics can make a home ineligible for a reverse mortgage. For the common HECM, properties must be 1-4 unit dwellings, with the borrower occupying one unit as their primary residence. Properties exceeding this four-unit limit are typically ineligible.
Manufactured homes often present specific challenges. While some can qualify, they must meet strict FHA requirements. Ineligible manufactured homes include those built before June 15, 1976, those not permanently affixed to a foundation, or those not titled as real estate. Homes without required HUD tags or failing to meet minimum size requirements, such as 400 square feet, are usually disqualified.
Cooperative (co-op) apartments are generally ineligible for HECM reverse mortgages due to their unique ownership structure. In a co-op, residents own shares in a corporation that holds the building’s title, not the real estate directly. This corporate ownership model typically does not align with federal reverse mortgage program requirements. While some proprietary reverse mortgages exist for co-ops, they are less common and have stricter lender criteria.
Properties not intended for residential occupancy by the borrower, such as investment properties or vacant land, are ineligible. Homes on income-producing land, like farms, also do not qualify. A reverse mortgage converts home equity for personal residential use, not for commercial or speculative ventures.
Occupancy and Ownership Disqualifications
How a home is used and its legal ownership structure can lead to disqualification. A primary requirement is that the home must serve as the borrower’s principal residence. This means the homeowner must occupy the property for most of the year, typically at least 183 days annually. Vacation homes, second homes, or rental properties not lived in as the primary residence are ineligible. Failing to maintain the property as a primary residence can result in the loan becoming due and payable.
Legal ownership issues can also pose significant hurdles. Properties held in certain trusts, like revocable living trusts, can be eligible if the trust document permits mortgaging. Irrevocable trusts are more complex and may cause ineligibility if they do not meet lender or FHA requirements regarding grantor control. Lenders review trust documents to ensure compliance and verify the borrower’s legal authority.
Properties with complex or unclear title issues may also be disqualified. The reverse mortgage must be in a first lien position, meaning existing liens must be resolved or paid off at closing. Situations where individuals not on the loan have an ownership interest, such as other family members or non-eligible spouses, can complicate eligibility unless specific conditions are met or ownership is restructured to meet program guidelines. While some long-term leasehold estates might be considered, many are ineligible; fee simple ownership is generally preferred.
Property Condition and Financial Constraints
Even if a property’s type, occupancy, and ownership are acceptable, its physical condition and financial encumbrances can lead to ineligibility. Homes must meet minimum property standards (MPS) to be safe, sound, and secure. Properties needing significant structural repairs, having health and safety hazards, or major code violations that cannot be reasonably funded or completed before the loan closing are typically ineligible. An FHA-approved appraisal identifies necessary repairs; major deficiencies must often be corrected beforehand.
Insufficient home equity can also prevent qualification. While the U.S. Department of Housing and Urban Development (HUD) does not specify an exact minimum equity percentage, industry practice suggests a homeowner needs approximately 50% equity. If the homeowner’s equity is too low relative to their age and current interest rates, the potential loan proceeds may not be sufficient to pay off any existing mortgages and still provide a meaningful amount of cash, making the transaction impractical or unfeasible.
Properties with existing liens and mortgages must ensure these debts can be resolved. Any existing mortgages, tax liens, or other significant financial obligations must typically be paid off by reverse mortgage proceeds at closing, or the borrower must bring funds. This ensures the reverse mortgage holds the primary lien position. Borrowers with delinquent federal debts, such as tax liens, may be ineligible until these obligations are satisfied, potentially through the reverse mortgage proceeds if permitted.