A reverse mortgage is a type of home equity loan that allows you to convert some of the existing equity in your home into cash while you retain ownership of the property.
Equity is the current cash value of a home minus the current loan balance.
A reverse mortgage works much like a traditional mortgage, except in reverse. Instead of the homeowner paying the lender each month, the lender pays the homeowner. As long as the homeowner continues to live in the home, no repayment of principal, interest, or servicing fees are required. The funds received from a reverse mortgage may be used for anything, including housing expenses, taxes, insurance, fuel or maintenance costs.
To qualify for a reverse mortgage, you must own your home. You may choose to receive the reverse mortgage funds in a lump sum, monthly advances, as a line-of-credit, or a combination of the three, depending on the reverse mortgage type and the lender. The amount of money you are eligible to borrow depends on your age, the amount of equity in your home, and the interest rate set by the lender. Because the borrower retains ownership of the home with a reverse mortgage, the borrower also continues to be responsible for taxes, repairs and maintenance.
Depending on the plan selected, a reverse mortgage is due with interest either when the homeowner permanently moves, sells the home, dies, or the end of a pre-selected loan term is reached. If the homeowner dies, the lender does not take ownership of the home. Instead, the heirs must pay off the loan, typically by refinancing the loan into a forward mortgage (if the heirs meet eligibility requirements) or by using the proceeds generated by the sale of the home.
For more in-depth analysis of the risks and rewards, check out this Realtor.com article.
To be eligible for an HECM, (An FHA Reverse Mortgage) you must satisfy the following requirements:
- 62 years old or older. You and/or an eligible spouse occupies the home as a primary residence
- Owns the home or has paid a significant amount on the property
- Is not delinquent on any federal debt
- Has participated in a mandatory consumer information session conducted by an HUD-approved HECM counselor
- Has enough financial resources to continue making timely payments on housing expenses (property taxes, mortgage insurance, maintenance etc.)
- Besides borrower requirements, your house must meet all FHA property standards: A single-family home or a two-to-four-unit home, with one unit occupied by the borrower. Can be a manufactured home that meets FHA standards.
- For condos, must be a HUD-approved condominium project.
- For individual condo units, it must meet FHA-approved single-unit requirements.
3 BIG MISCONCEPTIONS ABOUT REVERSE MORTGAGES:
1.) The home must be debt-free before client can qualify.
A buyer can have an existing mortgage on their home, however, the lien must be paid off prior to, or using the funds from the reverse mortgage at the close. Therefore, there must be enough equity in the home to provide enough calculated funds to satisfy any existing liens.
2.) The bank owns the home.
This is absolutely false.
The borrower is never asked to exchange the title of their home for securing a reverse mortgage. This is not a requirement for today’s FHA insured reverse mortgage, as well as FAR‘s proprietary products.
3.) The heirs incurred any outstanding mortgage debt.
Heirs are not responsible for any outstanding debt incurred on the reverse mortgage loan. FHA’s reverse mortgages, as well as FAR‘s proprietary products are all nonrecourse. Meaning, the only recourse the lender has to satisfy. The loan is through the sale or refinance of the subject home after a maturity event occurs such as the sale of property or the borrower passing.
