Reverse Mortgage on Rental Property: What You Need to Know

If you’re a homeowner who is 62 years or older and looking for ways to supplement your income, a reverse mortgage may be an option worth considering. A reverse mortgage loan allows homeowners to borrow money using their home as security for the loan. Meanwhile, you may be wondering whether it’s possible to obtain a reverse mortgage on a rental property.

In this article, we’ll explore the topic of reverse mortgages on rental properties and answer some common questions related to this subject.

On Getting a Reverse Mortgage for Your Rental Property

The short answer is no; you cannot take out a reverse mortgage on a rental property. To qualify for a reverse mortgage, the home must be your primary residence — the place where you live for most of the year. This means that vacation homes or rental properties are not eligible.

However, there is one exception. If you rent out part of your house but still live there yourself, then it’s possible to get a reverse mortgage. For example, if you have an extra unit in your home that generates rental income but still occupies another portion of the house as your primary residence, then it could potentially qualify for a reverse mortgage.

A reverse mortgage is used to provide homeowners with a way to tap into their home equity. This is to supplement their retirement income or cover expenses without having to sell their home. Rental properties do not qualify for reverse mortgages because they are not your primary residence.

Additionally, rental properties are considered investments. Note that lenders do not typically lend on investments through reverse mortgages.

Unlock Equity in Your Rental Property With This Guide to Getting a Reverse Mortgage

Look for a reputable lender that specializes in reverse mortgages. You can search online or ask for recommendations from friends or family members. Before you can apply for a reverse mortgage, note that you are required to meet with a HUD-approved counselor.

This counselor can help you understand the pros and cons of a reverse mortgage. Once you have chosen a lender and met with a counselor, you can submit your application for a reverse mortgage. The lender will review your application and determine whether you qualify for a loan.

Afterward, if you are approved for a reverse mortgage, an appraiser will visit your property. This is to determine its current value. Additionally, this will help the lender determine the amount of the loan that you qualify for. Once the appraisal is complete and your loan has been processed, you will receive your funds.

On the flip side, with a reverse mortgage, the loan balance increases over time. This is because interest accrues and is added to the loan balance. The equity in your property will then decrease over time, and you may have less equity to pass on.

The Pros and Cons of Taking Out a Reverse Mortgage on an Income-Producing Property

Let’s discuss the pros and cons of taking out a reverse mortgage on an investment property or rental property. Here are things to be mindful of:

Pros

• Additional Income. If you were able to obtain a reverse mortgage on your income-producing property, you could potentially receive additional income from the loan. This could help you cover expenses or supplement your retirement income.
• No Monthly Mortgage Payments. With a reverse mortgage, you typically do not have to make monthly mortgage payments. This can be beneficial for property owners who are on a fixed income or have limited cash flow.
• Loan Proceeds not Taxable. Reverse mortgage loan proceeds are typically not considered taxable income, so you won’t have to pay taxes on the money you receive.

Cons

• Fees and Closing Costs. Like any other mortgage, a reverse mortgage will come with fees and closing costs, which can be expensive. These costs can eat into the equity you have in your property, and you may end up owing more than you originally thought.
• Reduced Equity. With a reverse mortgage, the loan amount you receive plus interest will be due when you sell the property or pass away. This means that the equity you have in the property will be reduced, potentially leaving less for your heirs.
• Risk of Foreclosure. If you are unable to pay property taxes, maintain the property, or meet other requirements of the reverse mortgage, the lender can foreclose on the property. This can result in the loss of your investment and any remaining equity in the property.

To wrap up, while a reverse mortgage on an income-producing property may provide additional income and the ability to avoid monthly mortgage payments, it also comes with fees, reduced equity, and the risk of foreclosure. It’s important to carefully consider all the potential risks and benefits before deciding whether a reverse mortgage is the right option for you.

Conclusion

A reverse mortgage on a rental property can be a viable option for older individuals looking to access the equity in their property. While credit score is not a major factor, lenders will review your ability to continue to pay property expenses.

When considering a reverse mortgage, it’s essential to understand the potential impact on your Social Security benefits and to have a plan for repaying the loan when you or the last borrower permanently moves out.

FAQs

Q: Can I get approved even though my credit score isn’t perfect?

A: Your credit score is generally not a deciding factor in getting approved for a reverse mortgage on a rental property. Lenders will check if you have any outstanding tax liens or federal debt, and assess your ability to pay property expenses. The main requirement is having sufficient equity in the property and being at least 62 years old.

Q: Will taking out RM affect my Social Security benefits?

A: A reverse mortgage typically does not alter your Social Security benefits, as they are based on lifetime earnings. However, if you receive Supplemental Security Income (SSI), the proceeds from a reverse mortgage may impact your eligibility due to income and asset limits.

Q: Do I need to pay back anything that I’ve borrowed once I moved out permanently?

A: Yes, with a reverse mortgage, you will need to pay back the amount you have borrowed, along with any accrued interest and fees, once you move out permanently or the last borrower passes away. At that time, you or your heirs will have several options to repay the loan, including selling the property, using other assets to repay the loan, or refinancing.