Many retired homeowners look to their built-up home equity to generate extra income or fund new investments. If you’re considering rental properties, you might have thought about using a reverse mortgage loan to unlock that cash. After all, it sounds like a win-win—accessing funds without monthly mortgage payments while growing your real estate portfolio.
However, reverse mortgages have strict rules and restrictions, especially regarding rental properties.
Before making any big financial decisions, it’s crucial to understand the loan balance requirements, repayment rules, and eligibility restrictions tied to reverse mortgages. Knowing how these loans work and what alternatives are available can help you avoid costly mistakes and choose the best financing option for your rental property goals.
Let’s explore reverse mortgages for rental property rules and restrictions and discuss alternative financing solutions. By the end, you’ll know whether a reverse mortgage is right for your financial situation or if a different strategy is better.
What Is a Reverse Mortgage?
A reverse mortgage is a loan that allows homeowners aged 62 and older to borrow money against their home’s equity without making monthly mortgage payments. Instead of paying the lender, the lender provides you with a lump sum payment, fixed monthly payments, or a line of credit. However, the loan must be repaid when the homeowner sells, moves out, or passes away.
Reverse mortgages are often used as a financial tool for retirees, helping them cover living expenses, medical costs, or home improvements.
Rules and Restrictions of Reverse Mortgages for Rental Properties
Reverse mortgages can be a valuable financial tool, but they have strict guidelines, especially regarding rental properties. Let’s break down the key restrictions, acceptable rental situations, and essential reverse mortgage rules.
1. Reverse Mortgage Residency Rules: The Biggest Limitation
A non-negotiable rule is at the core of every reverse mortgage loan— you must live in the home as your primary residence.
This means you cannot use a reverse mortgage to buy a rental property or turn your home into an income-producing unit while maintaining the loan. If the home is no longer your primary residence, the loan becomes due, and you or your heirs must repay the loan balance—often by selling the property.
However, while reverse mortgages generally prohibit investment use, there are a few exceptions:
- Multi-Unit Homes (Up to Four Units) – If you live in one of the units and rent out the others, you may still qualify for a Home Equity Conversion Mortgage (HECM)—the most common reverse mortgage.
- Short-Term Rentals – Renting out a room in your home while you still live there may not violate residency rules, but it’s best to check with reverse mortgage lenders for specific policies.
- Non-Occupancy for Medical Reasons – If you move into a nursing home or assisted living facility for less than 12 consecutive months, your reverse mortgage may remain valid. However, longer stays could trigger loan repayment.
What Happens If You Move Out: At this point, you or your heirs must repay the loan using other funds, sell the home to pay off the balance, or refinance it if your heirs want to keep it.
2. Co-Borrowers and Non-Borrowing Spouses: Who Gets to Stay?
If your spouse or co-borrower still lives in a house with a reverse mortgage after you pass away, what happens next depends on their status.
For Co-Borrowers
They can continue living in the home and still benefit from the reverse mortgage funds.
For Non-Borrowing Spouses
If they qualify as eligible non-borrowing spouses, they may stay in the home but won’t receive additional loan proceeds. Meanwhile, they’ll have to repay the entire loan or leave the home if they are not eligible.
Pro Tip: Always check with a Department of Housing and Urban Development-approved counselor before signing a reverse mortgage to fully understand how it could impact your spouse, co-borrower, or heirs.
Financial Considerations of a Reverse Mortgage for Rental Properties
A reverse mortgage might seem like a great way to unlock home equity without monthly payments, but it comes with financial responsibilities. Before applying for one, it's crucial to understand how loan amounts are determined, the ongoing costs you’ll need to cover, and how rental income factors into the equation.
How Reverse Mortgage Loan Amounts Are Determined
Unlike a traditional mortgage, where you borrow based on income and creditworthiness, a reverse mortgage loan is primarily based on three key factors:
- Appraised Value of Your Home
The higher your home’s appraised value, the more equity you can borrow. However, federal limits may cap how much you can receive, even if your home is worth more. - Your Age
Older borrowers qualify for higher loan amounts since they are expected to hold the loan for a shorter time. Most reverse mortgages require the homeowner to be at least 62 years old to qualify. - Current Interest Rates
Just like with a traditional mortgage loan, interest rates play a role. Lower interest rates allow you to borrow more, while higher rates reduce the amount you receive.
The Ongoing Costs of a Reverse Mortgage
Many assume that a house with a reverse mortgage provides “free money,” but this isn’t true. Homeowners are still responsible for several ongoing expenses, and failing to keep up with them could put their homes at risk.
Property Taxes and Home Insurance
Even though you’re not making monthly mortgage payments, you still have to pay property taxes and homeowners’ insurance.
Mortgage Insurance Premiums
Most reverse mortgages are home equity conversion mortgages (HECMs) backed by the Federal Housing Administration (FHA). This means you’ll need to pay mortgage insurance premiums (MIP) to protect the lender if your loan balance exceeds your home's value.
Home Maintenance and Repairs
You must properly maintain the home to keep your reverse mortgage in good standing. If the property falls into disrepair, the lender may require you to fix it or risk defaulting on the loan.
Alternative Financing Options for Rental Properties
A reverse mortgage might not be the best choice if you want to borrow money to finance a rental. Instead, consider:
Home Equity Loan vs. Reverse Mortgage
A home equity loan or home equity line of credit (HELOC) allows you to borrow against your home’s equity without the restrictions of a reverse mortgage. These options let you use the funds however you want—including buying or maintaining a rental property.
Traditional Mortgage or Cash-Out Refinance
A traditional mortgage or cash-out refinance might be a better bet if you're still working and have a steady income. You can use the loan proceeds for a rental investment while controlling your home.
Work with Experts to Make the Best Financial Decision for Your Home!
If you're an older homeowner considering a reverse mortgage, it’s crucial to understand the rules—especially regarding rental properties. While a reverse mortgage loan can help unlock your home equity, it isn’t designed for investment properties. The residency rules require you to live in the home as your primary residence, meaning you can’t use a reverse mortgage to buy or maintain rental properties. If real estate investing is your goal, you may need to explore other financing options like a home equity loan or cash-out refinance.
As a trusted property management company in Indianapolis, IN, PMI Midwest helps rental property owners stay on top of their investments, whether they’re exploring financing options or simply looking for a hands-off approach. Our services include:
- Tenant screening and placement to find reliable renters.
- Property marketing to reduce vacancies and maximize rental income.
- Maintenance and repairs to keep your property in top condition.
- Rent collection and financial reporting to streamline cash flow.
- Legal compliance assistance to help you stay within Indiana’s landlord-tenant laws.
Let PMI Midwest handle the day-to-day management while you focus on making the best financial decisions for your future. Contact us today!
Related Articles
Thinking About Buying Another Rental Property? 4 Things to Consider First
