What is a Reverse Mortgage?
A reverse mortgage is a loan for senior homeowners that use a portion of the home’s equity as collateral. Reverse Mortgages were conceived as a means to help people in or near retirement and with limited income. They can use this money they have put into their home to pay off debts (including traditional mortgages), cover basic monthly living expenses or pay for health care. There is no restriction how a borrower may use their reverse mortgage proceeds.
Eligibility for a Reverse Mortgage
Home Equity Conversion Mortgage is a reverse mortgage. To be eligible for an HECM, the Federal Housing Administration (FHA) requires that all homeowners on the title be at least age 62. If there is a mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at the closing. Generally there are no income or credit score requirements for a reverse mortgage.
A reverse mortgage cannot be outlived. As long as at least one homeowner lives in the home as their primary residence and maintains the home in accordance with FHA requirements (keeping taxes and insurance current) the loan dues will not become due.
Estate Inheritance
In the event of death or in the event that the home ceases to be the primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage or put the home up for sale. If the equity in the home is higher than the balance of the loan, the remaining equity belongs to the estate. If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA. No other assets are affected by a reverse mortgage. For example, investments, second homes, care and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage.
How much do I qualify for with a reverse mortgage?
The amount that is available generally depends on four factors: age, current interest rate, appraised value of the home and government imposed lending limits. Your Cliffco Reverse Mortgage Consultant can tell you exactly how much money you qualify for!
Distribution of Proceeds From a Reverse Mortgage
There are several ways to receive the proceeds from a reverse mortgage:
- Lump sum- a lump sum of cash at closing.
- Tenure- equal monthly payments as long as the homeowner lives in the home.
- Term- equal monthly payments for a fixed number of years.
- Line of credit- draw any amount at any time until the line of credit is exhausted.
- Any combination of those listed above.
Features of Reverse Mortgages
- With a reverse mortgage, you always retain title to or ownership of your home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.
- Fees can be paid out of the loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. Your only out-of-pocket expense is the appraisal fee and maybe a charge for counseling depending on the counseling organization you work with. Together, these two fees will total a few hundred dollars. Very low-income homeowners may be exempt from being charged for counseling.
- With a Home Equity Conversion Mortgage (HECM), which is a government insured reverse mortgage option, you never have to pay more than the appraised value of the home or the sale price no matter how large the loan balance may be. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, the federal government will then absorb that loss. The government pays for it with proceeds from its insurance fund, which you as a borrower pay into a monthly basis.
Can I 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, you must own a home, have equity in your home and you must live in the home.
Do I remain on title of my home?
Yes, you absolutely remain on title of your home. The title is NEVER negotiable.
What’s the 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. The reverse mortgage is different in that it pays you and is available regardless of your current income or credit qualifications. The amount you can borrow depends on your age, the current interest rate and the appraised value of your home, sales price or FHA’s mortgage limits, whichever is less. Generally the more valuable your home is, the older you are and the lower interest, the more money you may qualify for.
With a HECM, you don’t make a monthly mortgage payment but rather the lender pays you according to the payment plan you select. Like all homeowners, you still are required to pay your real estate taxes, insurance and other conventional payments such as utilities. With an FHA HECM, you cannot be foreclosed or forced to vacate your house because you “missed your mortgage payment”.
When does my loan become due and payable?
An HECM loan must be repaid in full if you pass away or when you sell the home. The loan also becomes due and is payable if:
- You do not pay property taxes or hazard insurance or violate other obligations.
- You permanently move to a new principle residence.
- You or the last borrower fail to live in the home for 12-months in a row. An example of this situation would be if you (or the last borrower) were to have a 12 month or longer stay in a nursing home.
- You allow the property to deteriorate and do not make the necessary repairs.