The main eligibility requirements for a reverse mortgage are relatively few. You must:
- Be 62 or older.
- Own the home.
- Have substantial equity in the home.
- Live in the home as your primary residence.
If you look at the last requirement, which states you must “live in the home as your primary residence,” then renting out your house on which you have a reverse mortgage would not meet this rule. That said, the residency requirement would not restrict you from renting out a room in your house as long as you are the primary resident. Let’s take a closer look at the residency requirement and why it was imposed.
Since their inception in 1961, reverse mortgages have helped seniors 62 and older stay in their homes while providing them with tax-free cash and could be used to pay bills, fix up the house, cover big medical expenses, or use numerous other ways to improve their retirement. Hence, the “primary residency” requirement was imposed to support the loan’s original mission. To allow reverse mortgage borrowers to be absentee owners or landlords would have run counter to this purpose. Homeowners are still responsible, however, for home maintenance, the payment of property taxes and homeowners insurance, and compliance with the loan terms.
How is “primary residence” defined?
To be eligible for a reverse mortgage, borrowers must spend the majority of their time at their principal residence, a period defined as longer than six months a year. You can still use a reverse mortgage to help purchase a vacation or second residence, as you can use your reverse mortgage funds almost any way you wish, but potential eligibility for the reverse mortgage funds would be based on owning and continuing to occupy the home as your primary residence.
Acceptable rental situations
Notwithstanding the permanent residency requirement, there are circumstances that allow rentals. For example, a reverse mortgage borrower living in the home could rent out rooms and space in the home for additional income. Typically, renters must be considered long-term. Nightly rentals, like an Airbnb arrangement, might indicate to your lender that you’re occupying and operating your residence more as a business than a home. Because lenders may have different policies regarding short-term rentals, please check with them in advance for clarification and approval.
If you have a reverse mortgage on a multifamily property (up to four units), you are also entitled to rent out the units as long as you occupy one of the units as your primary residence. However, if you ever moved, leased, or sold your unit, you would have violated the primary residency requirement, making your loan due and payable. To find out if a reverse mortgage loan is right for you, click here.
Reverse mortgages weren’t designed to create a class of absentee owners and landlords. They were designed to help older homeowners find a dignified and financially sustainable way to live comfortably in their homes throughout their retirement so long as they continue paying their property taxes, homeowners insurance, maintain their home, and comply with the loan terms. Yet reverse mortgages still offer qualified borrowers a way to generate additional income by renting out rooms or units. The point is, be upfront with your lender, so you and your renters will know exactly where they stand.
For more information and clarification of the rental rules, consult your AAG reverse mortgage professional.
We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature, and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.
Can I rent out a room in my house on which I have a reverse mortgage?
Yes. Unless your homeowners association doesn’t allow it, you, as the primary owner and resident of the home, are free to rent a room or space to whomever you like.
Do I have to live in the home the entire year to meet the primary residency requirement?
If you own and live in the home as your primary residence for longer than six months, you meet the residency requirement.
Can I be eligible for a reverse mortgage on a five-unit property if I live in one of the units and rent out the other four units? No. Only multifamily properties of 1-4 units qualify for a reverse mortgage. To find out if a reverse mortgage loan is right for you, click here.