Demystifying the Reverse Mortgage Loan-to-Value Ratio

Reverse mortgages allow homeowners aged 62 and older to tap into their home equity without having to make monthly loan payments, But how much of your home’s value can you actually borrow through a reverse mortgage? The answer lies in understanding the reverse mortgage loan-to-value (LTV) ratio,

What is a Reverse Mortgage Loan-to-Value Ratio?

The loan-to-value ratio is one of the key factors lenders use to determine how much you can borrow with a reverse mortgage, It represents the maximum percentage of your home’s appraised value that you can take out as a loan,

For example, if your home is worth $300,000 and the lender’s reverse mortgage LTV is 60%, your maximum loan amount would be $180,000 (60% of $300,000).

Reverse mortgage LTVs generally fall in the range of 40% to 60% for most borrowers. However, the exact LTV depends on several important criteria.

What Affects Your Reverse Mortgage LTV?

There are a few main factors that impact the LTV you’ll be approved for with a reverse mortgage:

• Your age – The older you are, the higher your LTV will be. This is because lenders know older borrowers have a shorter life expectancy, so there is less risk of loan growth over time.

• Interest rates – When rates are lower, lenders can offer higher LTVs. Lower rates mean your loan balance grows slower.

• Home value – For higher value homes lenders may decrease the LTV to limit their risk exposure. The maximum claim amount also caps lending.

• Equity – Your existing home equity reduces the risk to lenders. The more equity you have, the higher your reverse mortgage LTV.

• Loan type – Government-insured reverse mortgages like HECMs have set maximum LTVs that lenders must follow.

Let’s explore each of these factors in more detail:

Your Age

Your age at the time you take out a reverse mortgage is directly correlated to your loan-to-value ratio. Why? Because the older you are, the shorter the expected loan term is.

Younger reverse mortgage borrowers tend to receive lower LTVs because the lender faces more interest rate and home value fluctuation risk over an extended loan period.

For example, a 62 year old may only qualify for a 50% LTV. But an 80 year old may receive a 60% LTV on the same home. Age is a big determining factor.

Interest Rates

Current interest rates also impact the maximum LTV a lender will offer. When rates are low, lenders can stretch LTVs higher while keeping loan growth in check.

The reverse mortgage loan balance grows each month as interest charges accrue. With lower interest rates, the balance grows slower, allowing lenders to offer higher LTVs.

So in a low rate environment, you may qualify for a higher LTV than when rates are elevated. This factor is outside of the borrower’s control, but can impact LTVs.

Home Value

For higher value homes, lenders tend to ratchet down maximum LTVs in order to limit their total risk exposure per loan.

For example, someone with a $500,000 home may only be approved for a 50% LTV compared to 60% for a $300,000 home. The total loan amount is still higher, but the LTV is reduced.

In addition, FHA-insured reverse mortgages have a maximum claim amount cap that limits total lending on higher value homes. This restricts LTVs on expensive properties.

Existing Home Equity

The more existing equity you have built up in your home, the higher reverse mortgage LTV you can qualify for.

If you have 75% equity, representing little risk to the lender, you may get a higher LTV approved versus if you only have 50% equity.

Your combined loan-to-value ratio (CLTV), accounting for any existing liens, also factors into the equation. The lower your CLTV, the better.

Loan Type

Different reverse mortgage programs have their own policies around LTV limits:

• HECMs – FHA-insured reverse mortgages have fixed maximum LTVs based on your age. In 2022, the highest LTV for any age is 64%.

• Proprietary programs – Private reverse mortgages set their own LTV criteria based on individual risk assessments. Maximum LTVs may be higher or lower than HECMs.

• Jumbo loans – Some lenders offer higher loan amounts and maximum LTVs than conforming loans.

So the specifics of your reverse mortgage program impact the maximum LTV you will be approved for. Government and proprietary programs have different requirements.

Reverse Mortgage LTV By Age

Let’s take a look at the maximum LTVs for the most common type of reverse mortgage – the FHA-insured Home Equity Conversion Mortgage or HECM:

As you can see, HECM LTVs range from 50% to 64% based solely on your age when the loan originates. The older you are, the higher the LTV you can qualify for.

This table highlights the direct relationship between age and your reverse mortgage loan-to-value ratio.

How Rising Home Values Impact Your LTV

One nuance of reverse mortgages is that your LTV may improve over time even if your age stays the same. This can happen when your home value appreciates.

For example, let’s say you took out a reverse mortgage at age 70 with a $200,000 maximum loan amount, representing a 62.97% LTV on your $300,000 home.

If in 5 years your home value has increased to $350,000, that same $200,000 loan balance now equates to a 57% LTV. Your equity cushion has grown.

This demonstrates how home price appreciation can actually decrease your loan-to-value ratio over the life of your reverse mortgage.

Tips for Qualifying for a Higher LTV

If your goal is to maximize the amount you can borrow with a reverse mortgage, here are some tips that may help you qualify for a higher LTV:

• Shop different lenders as maximum LTV policies vary
• Buy into a higher age band to increase FHA-approved LTVs
• Pay down or eliminate existing liens to boost overall equity
• Improve home value with updates and maintenance
• Wait for lower interest rates to get better LTVs
• Opt for a proprietary or jumbo reverse mortgage

While your age and home value are the two biggest factors, following the strategies above can help you optimize your loan-to-value ratio.

Every little bit higher LTV means more funds available to access from your home equity.

The Risks of High LTV Reverse Mortgages

One final point to make is that higher LTV reverse mortgages come with greater risks for borrowers:

• Loan balances grow faster eating through equity quicker
• More chance of negative equity over time
• Heirs left with lower net proceeds when home sold
• Higher chance of default if home values decline

Make sure you go into any reverse mortgage with eyes wide open. While accessing more of your equity upfront may be appealing, it comes with downsides to consider too.

Key Takeaways on Reverse Mortgage LTVs

The key points to remember about the reverse mortgage loan-to-value ratio include:

• Typical LTV range is 40% to 60% of home value
• Major factors include your age, rates, home value, equity
• FHA HECM maximum LTVs range from 50% to 64%
• Higher LTVs reduce heirs’ inheritance but allow larger loans
• Home price gains can lower your LTV over time

The reverse mortgage LTV has a big impact on your available loan proceeds. Understanding what goes into calculating it can help you make the most informed borrowing decision.