Reverse Mortgages

A reverse mortgage is a loan for seniors age 62 and older. HECM reverse mortgage loans are insured by the Federal Housing Administration (FHA) and allow homeowners to convert their home equity into cash with no monthly mortgage payments. All owners of the home (listed on the title) must be at least 62 years old to qualify.

To qualify for a reverse mortgage, you must own your home.

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.

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.

With a reverse mortgage, the borrower does not make monthly payments. However, the homeowner must still be able to cover property taxes, insurance, and other associated costs. Because the borrower retains ownership of the home with a reverse mortgage, the borrower also continues to be responsible for taxes, repairs and maintenance.

• 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.

A reverse mortgage loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately six months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage.

Although a specific type of reverse mortgage may impose different standards, in general, single family, one-unit dwellings are considered eligible properties for a reverse mortgage. Depending on the program, condominiums, planned unit developments (PUDs), and manufactured homes may be acceptable. Mobile homes and cooperative apartments are not generally eligible, although HUD may approve some types of mobile homes.

Reverse mortgage programs impose an additional condition on prospective borrowers by requiring them to participate in a consumer counseling session given by an approved counselor. This unbiased, independent counselor can help guide the borrower through what can be a confusing process and a lot of difficult decisions.

A typical reverse mortgage becomes due and must be repaid when the last surviving borrower:

• dies

• sells the house

• ceases to live in the house for 12 consecutive months

• fails to maintain the property, pay property taxes, or keep insured.

One of the most popular reverse mortgage programs is the Home Equity Conversion Mortgage (HECM) from the U.S. Department of Housing and Urban Development (HUD). HECM reverse mortgages are offered through the Federal Housing Administration (FHA), so this reverse mortgage is a federally insured private loan.

The basic requirements for the HECM are:

• The borrowers must be age 62 years or older, although the non-borrowing spouse can be younger.

• They must own the property and occupy the property as their primary residence.

• They generally must have only a small mortgage balance or no mortgage at all.

• They must participate in a consumer information session given by an approved HECM counselor

• Applicants will go through a financial assessment to determine if they are willing to meet financial obligations and comply with the mortgage requirements.

• No repayment is required as long as the property is the primary residence.

• Closing costs can be financed in the mortgage

• Eligible properties for a HUD HECM are single-family residences, one-to-four unit owner-occupied residences,

The mortgage amount considers the age of the youngest borrower and the lesser of either the appraised value of the house, the sale price of the property, or the national maximum amount set by the Federal Housing Administration.

If a HECM loan applicant has a spouse who is younger than 62 years old, the applicant can still qualify for a HECM as long as the younger spouse does not sign the loan; this individual becomes a non-borrowing  spouse for loan purposes.

• If the borrower then passes away, the HECM loan will not become due as long as the non-borrowing spouse still resides on the property and meets the criteria for the loan to remain in effect, which includes property maintenance, insurance, and tax payments.

HECM borrowers must also pay an initial mortgage insurance premium (MIP) of either 0.5% or 2.5%, depending on the disbursements chosen by the borrower. Borrowers are also charged annual MIP that is equal to 1.25% of the mortgage balance.

There are a few different ways you can take money out of a reverse mortgage. These include:

• Tenure: equal monthly payments as long as at least one borrower lives and continues to occupy the home as a primary residence.

• Term:  equal monthly payments for a fixed number of months.

• Line of credit: the borrower receives a loan advance up to the approved credit line. 

• Modified tenure: a combination of the line of credit with monthly payments for as long as the borrower lives in the home.

• Modified term: a combination of the line of credit with monthly payments for a fixed period of months selected by the borrower.