The 60% reverse mortgage rule: What it is and how it impacts borrowers now

As with most Americans, older homeowners have been facing issues with rising living costs and mounting debt recently. As a result, tapping into home equity has become an increasingly popular financial strategy for homeowners, as doing so allows them to borrow the money they need at an affordable rate. And, reverse mortgages — which allow borrowers age 62 and older to convert home equity into cash without monthly mortgage payments — offer a useful lifeline for seniors, in particular, but there are important rules that shape these types of loans. 

One of the most misunderstood is the 60% reverse mortgage rule. This rule doesn’t make headlines like interest rates or property value changes do, but it can still directly impact how much reverse mortgage borrowers can access upfront. And in today’s economy, where many seniors are looking for ways to stretch their retirement budgets, knowing how this rule works may be more important than ever.

That’s because the 60% rule could have a big impact on whether a reverse mortgage is the right solution to your borrowing issues, whether you need to tackle debt, cover unexpected expenses or supplement your income. Here’s what to know about it — and how it could affect your ability to get the relief you need now.

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What is the 60% reverse mortgage rule?

The 60% rule for reverse mortgages is a lending guideline that limits how much of your reverse mortgage proceeds you can access during the first year if you’re taking out a Home Equity Conversion Mortgage (HECM) that HUD insures. Specifically, the guideline dictates that borrowers can withdraw no more than 60% of their total HECM loan proceeds upfront unless they’re using more than that amount to pay off existing mandatory obligations, like a mortgage or federal debt.

The rule was introduced by the Federal Housing Administration (FHA) in 2013 as part of an effort to protect borrowers from depleting their home equity too quickly. The idea is to create a buffer, giving homeowners access to their much-needed reverse mortgage loan funds while encouraging longer-term financial sustainability.

Here’s how it works in practice. Let’s say your reverse mortgage analysis shows you’re eligible for $200,000 in total proceeds. In this case, the 60% rule means you can only access $120,000 during that crucial first year of borrowing. The remaining $80,000 sits in a line of credit that grows over time, but you’ll have to wait until after the 12-month mark to tap into it.

There is one important exception that can work in your favor, though. Homeowners with an existing mortgage(s) and/or lien(s) more than the 60% threshold can advance an additional 10%. So if you owe $140,000 on your current mortgage and your limit is $200,000, you’d be allowed to pay off that existing loan plus access an additional 10% ($20,000) for other expenses, giving you more breathing room than the standard 60% would allow.

That said, it’s worth noting that the 60% cap doesn’t apply to your total available home equity. Rather, it applies to the amount a lender determines you can borrow, which is based on your age, home value, current interest rates and other eligibility factors.

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How does the 60% reverse mortgage rule impact borrowers now?

While the 60% rule was introduced as a safeguard, it can present some practical challenges for borrowers today, especially as inflation, property taxes and healthcare costs continue to climb. After all, many older homeowners turn to reverse mortgages because they need access to a lump sum of cash right away, whether to pay off debts, make home improvements or cover unexpected medical bills. But the 60% limit can restrict how much you can draw upfront, potentially leaving some of those needs unmet.

For example, if your total reverse mortgage eligibility is $200,000, under the 60% rule, you’d be capped at $120,000 in the first year unless you’re using the loan to pay off a substantial mortgage balance or other required obligations. You’d then have to wait 12 months to access the remaining funds, even if you were hoping to access the full $200,000 to fund a long-term care plan or major home renovation. 

This delayed access can push some borrowers toward riskier financial behavior, like using high-rate credit cards or personal loans to fill the gaps. It can also make reverse mortgages less appealing for those who need an immediate, all-in-one financial solution.

On the other hand, the rule encourages responsible financial planning. By limiting large lump-sum withdrawals, it helps reduce the chances that borrowers will quickly burn through their equity and be left without sufficient reserves. It also provides time for borrowers to adjust to the financial shift of having a reverse mortgage, including budgeting for property taxes, homeowners insurance and home maintenance, which remain their responsibility under the loan.

The bottom line

The 60% reverse mortgage rule may not be widely known, but it plays a pivotal role in determining how much money borrowers can access — and when. While the limitation might feel restrictive at first, it’s designed to offer long-term financial protection and promote sustainability. Still, in today’s high-cost environment, it’s more important than ever to carefully evaluate how the rule aligns with your short- and long-term financial needs. So, before you borrow, make sure to speak with a qualified lender or financial advisor who can walk you through how the 60% rule would apply to your situation and whether it’s the right move for your goals.