A reverse mortgage allows senior homeowners to monetize the equity in their homes. The money may be used to meet financial requirements post-retirement. Such a mortgage is available to people aged 62 years and above. A reverse mortgage provides tax-free cash with no monthly installments.

However, stringent guidelines and rules apply to reverse mortgage loans. The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM) provided by the Department of Housing and Urban Development (HUD).

Eligibility criteria

To qualify for a HECM loan, here are the reverse mortgage eligibility criteria you need to meet:

• You need to be at least 62 years old.
• The home should be your primary residence, and you should be a resident of that property for a year or more.
• You should own the home, or a low balance should be outstanding on your home mortgage; the balance should be paid off before closing the HECM reverse mortgage.
• There should be no delinquency on the federal debt, such as income tax or student loans; however, the amount received from the reverse mortgage may be used to repay such loans.
• Some portion of the reverse mortgage loan amount should be set aside to meet expenses, such as property taxes, maintenance and repair costs, and insurance. Alternatively, you need to have adequate money to meet these expenses.
• The home should be in good condition, and you must willingly participate in counseling offered by HUD-approved agencies. The counselor will not only check your eligibility but will also help you understand the financial implications of the loan.

The loan amount depends on your age (or your spouse’s age, if you are a couple), the appraised value of the home, rate of interest, and the Federal Housing Agency’s (FHA) limit for HECM reverse mortgage. You may receive the money in different ways as listed below:

• Line of credit wherein the money may be accessed with a written application.
• Fixed monthly payouts for a predetermined period that does not change, even if the value of your home decreases.
• Tenure payouts wherein the money received as a fixed monthly sum and are discontinued either on your demise or if you quit the home.
• Modified term/line of credit is a hybrid payout wherein you receive a line of credit as well as a fixed monthly installment for a specific period.
• Modified tenure/line of credit, where you get a line of credit and fixed monthly installments if that is your primary residence.

Important pointers

Reverse mortgage loans are available only for your primary residence, and vacation homes or investment properties do not qualify for such loans. Generally, lenders offer up to 80% of the value of your home within the maximum limit defined by the FHA.

This type of loan is recommended if you plan to live in the same house for a long time after your retirement and do not want to pass it to your children. It is also an excellent way to generate additional funds to meet post-retirement requirements when you have also built a portfolio of other investments.

Reverse mortgages are complex, and it is best to seek expert advice before making a decision.