I have been working with clients of all ages for many years. Reverse mortgage questions don't come up unless clients are closer to retirement. When reverse mortgages do come up in conversation, clients will always ask. "Who qualifies for a reverse mortgage?
To qualify for a reverse mortgage in Canada, you (and your spouse) must be 55 years of age or older and live in the home you plan to finance. The amount of money you qualify for will depend on your age, the type and the value of your home. The older you are, the more mortgage you will qualify for.
A reverse mortgage is not qualified like a traditional mortgage. As a borrower, you are not required to make monthly payments to repay the mortgage. The interest owing for the amount that you borrow is accrued to the mortgage balance.
With a normal, or traditional mortgage you will make payments regularly basis. At the end of the year, the mortgage balance is lower than it was at the beginning of the year.
With a reverse mortgage, you are not required to make payments. The balance at the end of the year is higher than the balance at the beginning of the year.
Reverse mortgage lenders don't expect you to pay the money back until you sell the home or if you pass away. Therefore, reverse mortgage lenders are taking a little more risk, that's why interest rates are a little higher than traditional mortgage rates.
Reverse mortgage lenders rely on your home and it's value over the long term. They want to ensure the following:
- you live in the home (you will take better care of your own home more so than a rental property)
- pay your property taxes (there are options where you can get your property taxes deferred by your province, this is allowed)
- you maintain the home insurance (this protects you and your home and the lender's interest in your home)
- you keep the property in good repair
How does a reverse mortgage lender determine the value?
As you go through the qualification process to set up a reverse mortgage, the lender will complete an appraisal.
This appraisal will determine the value of your home and that will form the basis to calculate how much reverse mortgage you will qualify for.
The appraisal cost will range from $300 to $400 depending on where you live. The appraiser will compare your home to other homes in the neighborhood that have sold to evaluate your home's value.
Are there credit requirements to qualify for a reverse mortgage?
A reverse mortgage lender will check your credit but your credit score will not affect how much reverse mortgage that you qualify for. The criteria that determine how much you qualify for is your age, the property type and the value of your property.
If you are over 55 and have some bumped and bruised credit, then a reverse mortgage could be a very good financing option for you.
I have met some seniors who were doing well with their finances during retirement. Something happened and they started to use credit card debt to keep up with things. They had missed payments and were over limit on some cards.
We helped them set up a reverse mortgage. They qualified for almost 45% of their home's value and didn't have to use all that money.
They were able to pay off all the credit cards and other debt. They also had access to some extra money. Instead of taking a lump sum, they chose to withdraw some of the equity in their home monthly.
This extra, tax-free, cash flow provided a little bit of freedom and relief from all the living expenses that were creeping up every year.
Are there income requirements to qualify for a reverse mortgage?
For a reverse mortgage, there are no income requirements. As I mentioned before, the lender doesn't expect you to repay the mortgage until your home is sold or if you pass.
Because of the low documentation requirements, you can set up a reverse mortgage no matter how much or how little income you declare on your income tax returns.
I worked with a self-employed client was in his 70's and still did some consulting. His home was paid off and he also had a rental property that was almost paid off.
He wanted to do some things with his business that required cash. His credit was good, but he hadn't shown too much taxable income in the last few years.
Instead of setting up a mortgage or home equity line of credit a reverse mortgage was the best option for his situation. We used both his principal residence and the rental property as collateral and this provided all the cash he needed.
Plus, now that his rental property had a reverse mortgage, his cash flow increased substantially. The reverse mortgage put him in a much better financial position that a mortgage or HELOC would.
He was very happy to review all these options so that he could choose which made the most sense.
How much can I qualify for when I apply for a reverse mortgage?
The amount of mortgage that you will qualify for will be a percentage of your home's value less any currently outstanding mortgage. The maximum reverse mortgage will provide up to 55% of your home's value.
If you are over 80 years of age, the amount you qualify for will be closer to 55% of your home's value.
If you are under 60 years of age, then the amount that you qualify for will be closer to 15% of your home's value.
If you have a mortgage in place when you apply for a reverse mortgage, the current mortgage must be paid in full. You will receive the difference between the approved reverse mortgage limit and the current mortgage balance.
Do both borrowers have to be 55 years of age or older, for a reverse mortgage?
Yes, both borrowers must be 55 years of age or older to qualify for a reverse mortgage. The amount of the reverse mortgage is based on the youngest of the 2 applicants. The maximum amount that you can qualify for is up to 55% of the value of your home
How much money do you really get from a reverse mortgage?
The calculate how much you really get from a reverse mortgage, you subtract your current mortgage balance from the total reverse mortgage amount that you are approved for.
Let's look at an example. If your home is worth $500,000 and you are approved for a reverse mortgage to 50% of your home's value. You are approved for $250,000.
If you have no mortgage, then you will receive $250,000. However, if you have a mortgage of $150,000 owing, then you will receive $100,000. That's calculated by subtracting $150,000 from $250,000.
You can either elect to take this as a lump sum payment or you can elect to take this amount via monthly or quarterly or annual installments.
If you are concerned that you may spend the money too quickly, then choose the installment option.