Since your credit history and personal financial situation are not examined when applying for a reverse mortgage, the only real obstacle is an inadequate level of home equity. That’s because reverse mortgage borrowers must use the proceeds from the reverse mortgage first to pay off any primary mortgage debt. (Of course, those without any primary mortgage debt need not worry about this provision).

If you have significant (i.e. loan balance exceeds 50% of the value of your home) primary mortgage debt, you should consult HUD Principal Limit Factors. This is a table of HUD-mandated principal limits, broken down by age and interest rate, and expressed as a percentage of the value of your home. The principal limit will also vary depending on which type of Home Equity Conversion Mortgage (HECM) you wish to obtain. HECM Standard reverse mortgages carry higher principal limits than HECM Saver reverse mortgages, but require a significant upfront insurance premium.

To determine the maximum amount that you are eligible to borrow, simply scroll down to “5% Interest Rates,” and find the percentage listed next to your age. For HECM Standard loans, the principal limit varies between 61.9% and 77.6%, depending on your age. For HECM Saver loans, the range of principal limits is 52.3% to 61.0%. You will notice that as your age increases and the interest rate declines, the amount of cash you can potentially receive increases proportionally. However, since the current HUD-mandated interest rate floor is 5%, all values below 5% show the same principal limits.

When considering your eligibility, you should take the loan limit and subtract 7% (5% for HECM Saver Loans), which is a conservative estimate of the total closing costs, origination fee, upfront insurance premium, and Service Fee Set Aside (SFSA). If your primary mortgage debt exceeds this figure, you are not eligible to obtain a reverse mortgage.

Due to falling home prices and proportionally declining home equity, this is unfortunately a situation that nearly half of all homeowners will find themselves in. The only immediate solution is to use some of your savings to pay down your primary mortgage debt until it falls below the concomitant HUD principal limit. Otherwise, you can wait a few years under the hope that home prices (and your home equity) will rise or interest rates will fall. (Regardless of what happens, the maximum loan amount will automatically increase by .2-.4% for every year that you age).

Unless HUD raises the principal limits (which is unlikely given the program’s recent financial troubles), you might find yourself sadly shut out of the process.

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