What if you don’t have enough equity for a reverse mortgage?

One of the key requirements for borrowers to be eligible for a reverse mortgage is the amount of equity they have in their home. Although other factors are evaluated to determine a borrower’s eligibility for a reverse mortgage, equity is a key consideration. Borrowers who find themselves in a grey area when it comes to having enough equity may have other options. 

Here’s an explanation of how equity impacts reverse mortgage eligibility and options for borrowers. 

How much equity do you need for a reverse mortgage? 

The U.S. Department of Housing and Urban Development (HUD), the government agency that regulates home equity conversion mortgages (HECMs), does not have a set guideline on how much equity is required to take a reverse mortgage. They only state that borrowers must have considerable equity in their property. 

For a home equity conversion mortgage (HECM), industry norms put the equity borrowers need at approximately 50%. Generally speaking, this is the amount of equity that lenders usually require. 

When determining whether to fund a reverse mortgage, lenders will consider the amount of equity and other factors like the borrower’s financial record, the age of the youngest borrower, and the expected interest rate at the time of application.  

Borrowers hovering at or slightly below the 50% mark may find these other factors are enough to help them to be eligible. Other borrowers may need to increase their equity before taking a reverse mortgage or look for an alternative to a reverse mortgage. 

–> Learn more: What is a reverse mortgage and how does it work?

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What impacts equity? 

Equity in a home can fluctuate. In a traditional mortgage, if a borrower makes a down payment on a home or makes an extra mortgage payment, the equity in the home increases. However, equity isn’t always controlled by the borrower. Market fluctuations can impact equity, too. 

If property values are high, your home may appraise higher, increasing the equity in your home. If the property values decrease, the home equity also decreases.  

–> Learn more about the costs and fees associated with a reverse mortgage.

What can a borrower without enough equity do? 

Some borrowers, especially those with large mortgages or who recently purchased the property, will not have enough equity. Other borrowers may be just shy of the required amount. In either case, these are some options to increase home equity enough to be eligible for a reverse mortgage:

• Wait. A borrower can wait until the market value of the property increases. It may mean exercising patience because values can fluctuate and take time to rebound in a down market.  The appraised value will likely come higher than when market values are high. The borrower can capitalize on the increased equity in their home.  
• Pay down debt faster. A borrower can make extra mortgage payments to increase equity in the home. Building equity this way may take time, but it will put the borrower in a better position to be eligible for a HECM.  
• Borrow money. If a family member or friend is willing to lend or give the borrower money to help the borrower make a substantial payment on the mortgage, this could be one way to increase equity in the property.  
• Make home improvements. Making certain upgrades to the property could increase the home’s appraisal value. However, not all home improvements will necessarily increase equity in the home. It’s also important to weigh the cost of the improvement against the potential change in the home’s value.  

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Consider a HECM for purchase  

A home equity conversion mortgage (HECM) for purchase could offer an option for borrowers who wish to downsize and roll the proceeds from the sale of their home into the purchase of a new home.

Because a HECM for purchase is a reverse mortgage used to purchase a new home, there is no equity requirement to be eligible. The borrower does need to make a sizeable down payment, and the reverse mortgage covers the remaining purchase price. Aside from being used to purchase a new home, a HECM for purchase works exactly like HECM, offering borrowers the same advantage of no monthly mortgage payments. Also like a HECM, as part of their mortgage terms, borrowers are still responsible for paying their property taxes, insurance and other fees related to homeownership, like HOA dues.