Things You Need to Know About Reverse Mortgages
A reverse mortgage (lifetime mortgage) is a loan available to seniors that lets you convert a portion of the home equity in to cash as one lump sum or multiple payments. The equity that built up over years of home mortgage payments can be paid to you. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves.
The lender cannot take your home away from you, if you outlive the life of the loan. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house, and keeps property taxes and insurance current. You can never owe more than the value of your home at the time you or your heirs sell the home.
When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.
Unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. FHA’s HECM provides these benefits. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
Eligibility Requirements
To qualify for a reverse mortgage, the borrower must be at least 62 years of age. You do not need a source of income to qualify for a reverse mortgage or require credit check, but there are other requirements and homeowners should make sure that they qualify for the loan before they invest significant time or money into the process.
Your home will be appraised and the lender will determine the amount you are eligible to borrow.
For most reverse mortgages, the money can be used for any purpose; however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds.
Some types of dwellings do not qualify, while others such as mobile homes, have special requirements in order to be approved.
Before borrowing, applicants must seek third party financial counseling from a source which is approved by the Department of Housing and Urban Development (HUD). The counseling is an important process to help the borrower completely understands reverse mortgage and what the borrower is getting into.
HUD Counseling for a Reverse Mortgage
To apply for an FHA/HUD reverse mortgage, a borrower is required to complete a counseling session with a HUD-approved counselor. The counselor will explain the legal and financial obligations of a reverse mortgage. After the counseling session, the borrower receives a “certificate of counseling” that is required before the loan application can be processed.
Are you qualify for FHA’s HECM reverse mortgage?
To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, and you must live in the home. You are further required to receive consumer information from an approved HECM counselor prior to obtaining the loan.
You can contact the Housing Counseling Clearinghouse by calling (800) 569-4287 for the name and telephone number of a HUD-approved counseling agency and a list of FHA-approved lenders in your area.
Difference between a reverse mortgage and a bank home equity loan
With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments.
Instead, the reverse mortgage pays you — regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.
You will not be making monthly payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your property taxes, home insurance and other payments like utilities.
How much money can you get from your home?
The amount of money available to you is determined by these primary factors:
- The appraised value of the property or FHA’s mortgage limits for your area, whether any health or safety repairs need to be made to the house, and whether there are any existing liens on the house.
- The interest rate, as determined by the U.S. Treasury 1 year T-Bill, the LIBOR index or 1 Year CMT.
- The age of the senior (The older the senior is, the more money you will receive).
- Whether the payment is taken as line of credit, lump sum, or monthly payments. Line of credit will maximize the money available, while lump sum provides the cash immediately, but the interest fees are the highest. Monthly payments are set up as a “Tenure” payment. Borrowers receive them for the rest of their lives no matter how long they live.
Reverse Mortgage Payment Options
Tenure: equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
Term: equal monthly payments for a fixed period of months selected.
Line of Credit: unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted.
Modified Tenure: combination of line of credit with monthly payments for as long as you remain in the home.
Modified Term: combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
Find name and location of a HUD-approved housing counseling agency near you.
Call (800) 569-4287 toll-free.
National Reverse Mortgage Lenders Association (NRMLA)
American Association of Retired Persons (AARP.org)
