How much you can borrow is based on three factors, your life expectancy, the value of your home, and the equity of your home.
An easy way to look at life expectancy is to compare the reverse mortgage to a life insurance policy. Life expectancy for a reverse mortgage is figured exactly the opposite of life insurance. As you know, the older you get, the more you pay for life insurance. The insurer wants you to make enough payments on the policy to make a profit before having to pay the death benefit. The insurer does not know how long you will live, but knows that by writing thousands of policies, the average life expectancy of the insured is predictable.
With a reverse mortgage, older is better. Since the lender is paying you until you move or die, the older you are, theoretically, the shorter your remaining life. The lender can pay more over your remaining years since there are fewer years remaining. Based on this, if you are not at least 62 years old, you are not eligible for a reverse mortgage. The average life expectancy is too great for people under age 62 for banks to take the risk of loaning money on a reverse mortgage. Just as Social Security eligibility is changing as people live longer, the minimum age for a reverse mortgage may change. If the age requirement is not raised as life expectancy increases, the amount that can be borrowed will have to be lowered to keep the system profitable.
The second factor is the value of your property. Just as with a standard mortgage, the loan amount will be limited by the value of the property. The loan-to-value ratio will be lower for a reverse mortgage, since your debt is increasing over time rather than decreasing as it would with a standard loan.
Your income or income level is not a factor in getting a reverse mortgage.
Your property’s value may be even more important if the reverse mortgage has no limit. The FHA limits the amount that you can borrow on a reverse mortgage, just as it does for standard mortgages. Some lenders offer no-limit reverse mortgages. If your home is worth a million dollars and you want the biggest loan you can get, the FHA is not for you.
The third factor is your equity. If you have $100,000 in equity, you will not be able to borrow as much as you would if you had $200,000 in equity. This is obvious and works the same way as a standard loan. The difference with some reverse mortgages is that the increasing value of your home is automatically considered.
Everyone knows that housing prices have increased over the years. Prices may fall temporarily, even steeply, but the general trend is up. You would be hard-pressed to find a home today that is valued at less than it was twenty years ago.
If you have a standard mortgage, you can refinance as the value of your home increases, and borrow more money. With certain reverse mortgage loans, the increase in value is built into the loan. The amount you can borrow keeps increasing without the need for refinancing.