Reverse Mortgage Property Requirements

Eligible Property Types Under the HECM Program

The federal statute begins with the shape of the building. It says a HECM must "be secured by a dwelling that is designed principally for a 1- to 4-family residence in which the mortgagor occupies 1 of the units" (12 U.S.C. § 1715z-20(d)(3)).

In practice, that covers these types of home:

• A single-family house. This is the standard case.
• A two- to four-unit building. This qualifies only when the borrower lives in one of the units as a principal residence.
• A condominium unit. HUD's lender guide states that a HECM property must meet FHA property standards. For a condo, that review can reach beyond the unit to the project as a whole. The lender can say what applies to a given building.
• A manufactured home. It may qualify when it meets FHA's property standards and flood requirements. HUD sets those standards, and the lender applies them.
• A cooperative (co-op) unit. The statute's definition of a mortgage includes a lien on the stock allocated to a unit in a residential cooperative housing corporation. Whether a particular co-op can be used depends on HUD's current requirements.

Title matters too. Under 24 C.F.R. § 206.45, the mortgage must be on property held in fee simple, which means outright ownership. It may also be on a long-term leasehold that meets the regulation's duration rules.

Vacation homes and rental properties do not fit. Under 24 C.F.R. § 206.39, the property must be the principal residence of each borrower at closing. The CFPB explains a principal residence as the home where a person lives the majority of the year. Proprietary reverse mortgages may accept property types that a HECM does not.

If the home is a condo, a duplex or a manufactured home, the type of property shapes what review comes next.

Your Home's Condition: What the Rules Actually Require

A worn roof or an aging furnace can make a homeowner wonder whether the house is simply too old. The rule is less strict than that fear suggests. Under 24 C.F.R. § 206.47, a property must meet HUD's property requirements. If it does not, it "must be repaired in order to ensure that the repaired property will serve as adequate security for the insured mortgage."

The review starts with an appraisal. An appraisal is an independent professional assessment of the home's market value and its condition. HUD's lender guide states that a HECM property must meet FHA property standards and flood requirements. These are baseline rules about safety, soundness and security.

If problems turn up, the CFPB says the lender will explain what repairs are needed before the loan can be made. The lender then explains how and when those repairs are handled under the loan's terms. A home in imperfect condition is not ruled out automatically. It does need to be repairable.

The appraisal also affects the loan amount. HUD states that the amount available depends on several things. These include the age of the youngest borrower or eligible non-borrowing spouse, the current interest rate, and the lesser of the appraised value, the HECM FHA mortgage limit or the sales price. HUD publishes the current limit. As a hypothetical illustration, two neighbors with similar homes could see different amounts because their ages differ.

A home that needs work is not automatically out of reach, but its condition will affect what happens at the appraisal.

Occupancy: The Principal Residence Requirement

The occupancy rule is not a box checked once at closing. It is a promise that lasts as long as the loan does. HUD states that HECM borrowers may stay in their homes indefinitely as long as property taxes and homeowner's insurance are kept current. The borrower must also keep living there.

Under 24 C.F.R. § 206.27(c), the balance becomes due in full when a borrower dies and the property is not the principal residence of at least one surviving borrower. It also becomes due when a borrower conveys all title and no other borrower keeps title. With the Commissioner's approval, it can also become due in these cases:

• the home stops being a borrower's principal residence for reasons other than death, and no other borrower lives there;
• a borrower is away for more than 12 consecutive months because of physical or mental illness, and no other borrower lives there;
• property charges go unpaid;
• another obligation under the mortgage is not performed.

That 12-month rule matters to a family when a parent moves into a care facility. A spouse who is not on the loan may be protected as well. The same regulation provides a Deferral Period for an Eligible Non-Borrowing Spouse. It postpones the due date while that spouse meets the program's conditions.

A borrower can lose the home. If the loan comes due and is not repaid, the lender may foreclose. Meanwhile the balance keeps growing as interest and fees are added.

Keeping the Loan: Taxes, Insurance, and Maintenance

The other duties are the ordinary costs of owning a home, which continue for the life of the loan. The CFPB states that reverse mortgage borrowers are required to pay property taxes and homeowners insurance, use the property as their principal residence, and keep the house in good condition. Homeowners insurance is a policy that covers the home against damage, such as damage from fire.

These duties are part of the loan's terms. Under 24 C.F.R. § 206.27(c), failing to provide for the payment of property charges, or failing to perform another obligation under the mortgage, can make the balance due with the Commissioner's approval. An unpaid tax bill is a serious matter under this kind of loan, not a small slip.

Lenders look at this ahead of time. Part of the loan process is a review of whether the borrower can meet these costs, sometimes called a financial assessment. The CFPB says a borrower must have enough of their own money, or agree to set aside part of the reverse mortgage funds at closing, to pay ongoing property charges. Those charges include taxes, insurance, maintenance and repair costs.

That set-aside is sometimes called a Life Expectancy Set-Aside. It is a portion of the loan proceeds held back to pay future property charges. It works as a cushion that protects the borrower from default, not as a penalty. The lender discloses how it applies to a particular loan.

These are not new costs, but under this kind of loan they carry real consequences if they go unpaid.

Property Types That Do Not Qualify — and What That Means

Learning that a home does not fit the HECM rules can feel like a door closing. Usually, it means a different set of options. Based on the rules above, these homes do not qualify for a HECM:

• a vacation home or rental property that is not the borrower's principal residence;
• commercial property, or a building not designed principally for one to four families;
• land without a qualifying dwelling;
• a home that cannot be repaired to meet FHA property standards;
• a condo or manufactured home that does not meet FHA's requirements.

For a condo, the issue may lie with the project rather than the unit. Any change at that level runs through the association.

Several other paths exist, and each involves a tradeoff. A proprietary reverse mortgage may cover some property types a HECM does not, but its rules are set privately. A home equity loan or line of credit may cost less, but the CFPB notes these usually carry monthly payments and depend on income and credit. The tradeoffs are laid out in reverse mortgage vs HELOC. A cash-out refinance replaces the existing mortgage with a larger one. Selling or downsizing turns equity into cash but means moving.

Repair help is another option. USDA's Section 504 Home Repair program offers grants to very-low-income homeowners 62 or older in eligible rural areas to remove health and safety hazards. A reverse mortgage is one option among several, and which one fits depends on the whole household picture.

The HECM Counseling Requirement and Next Steps

One step comes before any HECM application, and it is meant to protect the homeowner. The statute requires the borrower to have "received adequate counseling" from an independent third party (12 U.S.C. § 1715z-20(d)(2)(B)). That counselor cannot be associated with or paid by anyone involved in originating or funding the loan, or by anyone selling annuities, investments or insurance. The one exception the statute allows is that counseling may be waived for certain refinances of an existing HECM.

Under the statute, the counselor discusses options other than a HECM, other ways to convert home equity such as property tax deferral, the financial effects of the loan, and its possible effect on the estate and heirs. The list continues with any other information HUD requires. The FTC adds that a borrower does not have to buy any financial product to get a reverse mortgage.

HUD's HECM page explains how to find a counselor through its HECM Counselor Roster, or by calling (800) 569-4287. The CFPB's Ask CFPB pages explain the loan in plain language. The person-centered rules, such as age, are covered under reverse mortgage eligibility. The general walk-through of how a reverse mortgage works shows how these pieces fit together.

The counseling session is a chance to ask questions and hear the full picture before any commitment is made.