Reverse Mortgage: What Is It and Who Qualifies
A reverse mortgage is an ideal way for senior citizens to meet their financial needs simply by tapping into their home’s equity. This type of mortgage is designed for homeowners who are 62 years and above, especially those going through a cash-drought but have some built-up equity in their home.
But before you send in your reverse mortgage application, you may want to know exactly what it is, and how it works.
What Is A Reverse Mortgage?
It is a type of mortgage that allows home owners who are 62 years or over to convert their home’s equity into cash. The money is then paid to the borrower periodically as agreed upon with the lender.
In essence, it is like a loan borrowed against a home, except that you won’t have to repay it as long as you still own and live in that home.
The mortgage is called ‘reverse’ because instead of you paying the lender every month for your mortgage, it is the other way round – the lender pays you on a monthly basis (or as agreed upon).
Things to keep in mind though are that:
- You can’t receive more money than the value of the home.
- You don’t have to pay back the loan as long as you own and live in the home.
- It, however, the loan matures when you pass away, move out, or sell the house.
What Happens When A Reverse Mortgage Matures?
As mentioned already, a reverse mortgage loan can mature under one of these three conditions:
- When you die
- When you move out of the home
- When you sell the home
So what happens after that? There are several options:
- The mortgage can be transferred to your spouse or co-borrower. Note that nowadays lenders require that both you and your spouse be part of the reverse mortgage contract.
- Heirs can sell the property and pay off the outstanding loan from the reverse mortgage. Whatever amount remains from the sell is theirs to keep.
- Heirs can inherit the mortgage and either pay it off from their own money or refinance it and start paying the new mortgage. That will allow them to keep the property.
- Heirs can opt to walk away from the mortgage. That may be an option to explore if the house doesn’t have substantial equity or if the mortgage is underwater.
An underwater mortgage is one whose outstanding balance is more than the fair value of the home. In that case, selling the property results in a loss. Although walking away from your home may be a viable option, there’s always sentimental value to consider. Some heirs may prefer to keep the home even if it has no equity simply because of its significance to the family.
Types of Reverse Mortgages
There are three main types of reverse mortgages:
- Home Equity Conversion Mortgage (HECM): this mortgage is insured by the Department of Housing and Urban Development (HUD) through the Federal Housing Administration (FHA). It is the most popular and preferred type because it can be used for any purpose.
- Single-purpose reverse mortgage: you can only use this reverse mortgage for one purpose that the lender usually specifies. For example, some lenders offer reverse mortgages for home improvements only. There are also those who offer it for long-term medical care and nothing else.
- Proprietary reverse mortgage: this is a private reverse mortgage that is created and offered by private lenders. The terms and conditions vary from one lender to another.
A reverse mortgage is a loan just like any other, which is why lenders do underwriting before approval. What do they consider in that process?
Age: to be eligible for a reverse mortgage you have to be at least 62 years old. Even if your spouse is younger than 62, your mortgage may still be approved based on your age.
Property: virtually all homes that meet the FHA’s minimum property standards are eligible for a reverse mortgage. That includes family houses, single to four-unit homes, condos, and manufactured homes. You should, however, be the outright owner of the property, hold its title, and use it as your primary residence.
Property charges: lenders usually ask that you pay off any existing mortgage or lien using the proceeds from a reverse mortgage. You should also be capable of making timely payments of any property charges, such as insurance, taxes, and any other fees.
Delinquency: you should not be a delinquent on any federal debt. That includes taxes and all government loans (e.g. student loan).
Counselling: you must participate in regular counseling sessions on consumer information. The meetings are usually offered by HUD-approved counselors for free.
Other Things to Keep In Mind
- Maximum amount: there’s no set limit for a reverse mortgage. Individual lenders usually determine how much money you are able to get based on several factors that include: your age and that of other borrowers, the appraised value of the home, and the FHA loan limit of your location.
- Repaying the loan: if you don’t wish to see the loan mature (after your death or if you move or sell the house), you can opt to pay it off. In the event that you die, your heirs won’t have to repay it until 6 months after the last homeowner dies or moves out of the property.
How Are Reverse Mortgage Payments Made?
You can receive your reverse mortgage payments in one or a combination of the following ways:
- Tenure: in this case, you will get monthly payments for the whole life of the mortgage loan.
- Term: here you get monthly payments for a pre-determined period, say 10 or 20 years.
- Lump sum: under this option, you will receive all the money due to you upon closing of the mortgage.
- Credit line: you will withdraw the amount as you need it until you reach the maximum allowed.
Benefits of a Reverse Mortgage
The first and standout advantage of a reverse mortgage is the fact that it makes it possible for seniors and retirees to get cash easily. Besides that, this mortgage also:
- Doesn’t require the borrower to make monthly payments.
- Keeps borrower financially afloat even if they are retired
- Enables borrower to meet debt obligations like credit card payments.
- Can be used to pay off an existing mortgage.
While it is generally beneficial, a reverse mortgage does have some downsides to keep in mind. Firstly, it attracts fees and closing costs, which when combined with property taxes and insurance, can be very expensive. The good thing is that you get money that you can channel towards those expenses.
Secondly, the mortgage will complicate your wish to keep a home. That is especially true if you don’t have the necessary money or heirs who can pay it off before or after your death. The lender will repossess the house.
With sound financial planning and a reliable mortgage company, you don’t have to face the risk of losing your home. You can also get creative ways of keeping the costs to a minimum. That is what we here at Mortgage Right do – we help clients get the mortgage they need without the risk of losing their home.
Our team of dedicated mortgage experts have vast experience in reverse mortgages and can help you get cash from your home’s equity. Want to know if you’re eligible for a reverse mortgage? Or perhaps if it is the best time to consider it? Give us a call today.