HECM reverse mortgages have gained popularity as 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 their home equity into cash, providing a source of income during retirement. However, before diving into the world of HECM reverse mortgages, it’s crucial to understand the residual income requirement, 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, where clients make monthly payments, 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, and any remaining equity goes to the homeowner or their heirs.

The Residual Income Requirement:

One of the essential aspects of HECM reverse mortgages is the residual income requirement. This criterion is designed to ensure that homeowners have enough income to cover their living expenses, including property taxes, insurance, and basic maintenance costs, even after taking out a reverse mortgage. 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 clients ongoing living expenses. The federal government has established an expected residual income requirement for clients based on their regional location and family size. The specifics of these requirements are published by HUD in the HECM FINANCIAL ASSESSMENT AND PROPERTY CHARGE GUIDE here.

This is what the federal government has established for residual income requirements as of 2024:

FAMILY SIZE	NORTHEAST	MIDWEST	SOUTH	WEST
ONE	540	529	529	589
TWO	906	886	886	998
THREE	946	927	927	1031
FOUR OR MORE	1066	1041	1041	1160

One thing to consider is, the residual income requirement doesn’t always mean you have to have that 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 enough income to meet the residual income requirement listed on this chart, you should still inquire about getting a reverse mortgage. We are very experienced with getting people qualified who do not meet this requirement or who have been told by other companies that they don’t qualify.

Why is Residual Income Important?

Before 2017, there wasn’t a residual income requirement and it led to some people not being able to follow through with their agreed upon loan commitment. The federal government passed this requirement as a safeguard to prevent homeowners from entering into a reverse mortgage without the means to maintain their property and cover essential living expenses. This is particularly crucial because clients are still responsible for these expenses even after obtaining a reverse mortgage.

Lenders want to ensure that homeowners have the financial capacity to manage their property, keeping it in good condition and avoiding any potential issues that could arise from neglect. Meeting the residual income requirement also ensures that clients can continue to enjoy a comfortable and secure living environment throughout their retirement.

The residual 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.