Many retirees who wish to continue living in their current homes for as long as possible look to reverse mortgages to help them do so. Over time, these homes may require improvements to better suit the aging in place needs of their inhabitants. But before a homeowner can benefit from a reverse mortgage, the property must first meet certain eligibility standards.
The majority of reverse mortgages available in the market today are known as Home Equity Conversion Mortgages (HECMs). These loans are insured by the Federal Housing Administration (FHA), a government agency that is part of the Department of Housing and Urban Development (HUD).
Reverse mortgages allow homeowners age 62 and older to convert a portion of their home equity into loan proceeds, which they can use at their own discretion without restriction. Unlike a traditional mortgage, the loan balance on a reverse mortgage increases over time.
Additionally, borrowers are not required to make monthly payments as they would for a traditional mortgage, and the loan balance becomes due and payable once the borrower dies or else permanently vacates the property securing the reverse mortgage.
Because the vast majority of reverse mortgages are insured by the federal government, there are several standards that properties must meet in order to become eligible for HECMs.
What are the property requirements?
Building codes. To be eligible for FHA financing, HUD requires that each property insured with an FHA mortgage meet one of the nationally recognized building codes, or a State or local building code that is based on a nationally recognized building code.
Home features. The agency does not specify minimum requirement codes for the durability of items such as doors, windows, gutters and downspouts, paintings and wall coverings, kitchen cabinets and carpeting. HUD does, however, include minimum standards for these features, as well as other items, to ensure that the value of an FHA-insured home.
Hazards. HUD also requires the property be free of any hazards that adversely affect the health and safety of the occupants, or the structural soundness of the improvements. Such hazards include the presence of toxic chemicals, radioactive materials or other pollution, flood, erosion or inadequate drainage outfall, to name a few.
Even if potentially significant hazards are present, properties may still be eligible for FHA financing if the dangers are corrected.
(Credit: Full list of property requirements and .pdf info guide aided research at Reverse.mortgage – URL: https://reverse.mortgage#reverse-mortgage)
Getting your home up to code
Before you can obtain a reverse mortgage, your property must meet FHA/HUD building standards and pass inspection prior to loan closing. Depending on the level of work that needs to be done, this could be an obstacle to obtaining a HECM.
Luckily, there are companies that specialize in home repair and restoration for the mortgage industry, with some even having a particular focus on FHA reverse mortgage pre-closing inspections.
One company, for example, is Fidelity Homestead Associates, which connects homeowners with skilled contractors who can accomplish the needed repairs in order for their property to achieve FHA eligibility.
What properties are eligible for HECMs?
Residents living in homes of different shapes and sizes may be able to obtain reverse mortgages on their residences, but there are some property types FHA does not authorize for HECM loans.
Eligible properties for FHA financing include:
- Single-family homes,
- 2-4 unit homes with one unit occupied by the borrower,
- HUD-approved condominium projects,
- Manufactured homes that meet FHA requirements.
Newly constructed homes are also eligible for HECMs, provided a certificate of occupancy (or equivalent) has been issued for the property by the local government authority; the home is 100% complete; and the owner is occupying the property.
Property types that are not eligible for HECMs include housing cooperative units, boarding houses, as well as bed and breakfast establishments. Certain existing manufactured homes built after 1976 may also not be eligible for financing under FHA guidelines.
To find out what properties are eligible to secure reverse mortgages, visit the government site HUD.gov or speak to your trusted financial advisor.