HECM reverse mortgages are a financial tool for seniors looking to tap into their home equity without selling their property. This unique financial product allows homeowners aged 62+ to convert a portion of home equity into cash. This provides an additional source of income during retirement. However, it’s crucial to understand the residual income requirement for HECM, a key factor that can influence your eligibility.
Understanding the Residual Income Requirement
HECM reverse mortgages work by allowing homeowners to borrow against the equity they’ve built in their homes over the years. Unlike traditional mortgages, reverse mortgages don’t require repayment until the homeowner sells the home, moves out permanently, or passes away. The loan is repaid through the sale or refinance of the home. After loan repayment, any remaining equity goes to the homeowner or their heirs.
Increased Financial Security
One of the essential aspects of HECM reverse mortgages is the residual income requirement. This ensures that homeowners have enough income for their living expenses, including property taxes, insurance, and basic maintenance costs. The purpose is to protect clients from financial instability and potential foreclosure.
The residual income requirement is calculated by subtracting certain expenses from the borrower’s total income. These expenses typically include property taxes, homeowner’s insurance, and maintenance costs. The remaining amount, or residual income, should be sufficient to cover the client’s ongoing living expenses. The federal government has established an expected residual income requirement for clients based on their regional location and family size. These requirements are published by HUD in the HECM FINANCIAL ASSESSMENT AND PROPERTY CHARGE GUIDE.
Federal Residual Income Requirement as of 2024:
| Residual Incomes by Region | ||||
| Family Size | Northeast | Midwest | South | West |
| One | $540 | $529 | $529 | $589 |
| Two | $906 | $886 | $886 | $998 |
| Three | $946 | $927 | $927 | $1,031 |
| Four or more | $1,066 | $1,041 | $1,041 | $1,160 |
The regions are defined as:
Furthermore, this doesn’t always mean you must have this income BEFORE you apply for a reverse mortgage. There may be ways we can count the expected reverse mortgage proceeds as income to get you qualified. If you do not have the income listed on this chart, still inquire about a reverse mortgage. We are very experienced with getting people qualified who do not meet this requirement. Even if you have been told by other companies that you don’t qualify, you should inquire with us.
Why is Residual Income Important?
Before 2017, there wasn’t a residual income requirement. This led to some people not being able to follow through with their agreed-upon loan commitment. The federal government initiated this as a safeguard for homeowners without the means to cover essential living expenses. This is particularly crucial because clients are still responsible for these expenses even after obtaining a reverse mortgage.
Increased Protection for Seniors
Lenders want to ensure that homeowners have the financial capacity to manage their property. It is imperative to keep it in good condition and avoid any potential issues that could arise from neglect. The residual income requirement also ensures that clients can continue to enjoy a comfortable and secure living environment throughout their retirement.
This income requirement is a crucial aspect of reverse mortgages, designed to protect homeowners and ensure they have the financial means to maintain their property and cover living expenses. As with any financial decision, it’s essential to thoroughly understand the terms, evaluate your financial situation, and plan accordingly. By understanding the residual income requirement, you can enjoy the benefits of a reverse mortgage while maintaining a secure and comfortable retirement lifestyle.