While a reverse mortgage can help you maintain financial stability in retirement, it comes with essential responsibilities.
- Reverse mortgage loans require you to live in the mortgaged home as your primary residence.
- Reverse mortgages require you to meet the financial obligations of insurance, taxes, and other property charges.
- You must maintain your home and keep it in good condition.
A reverse mortgage is a kind of mortgage loan that lets you borrow some of the equity from your home. The most common type of reverse mortgage is a Home Equity Conversion Mortgage or HECM. This kind of loan is only available to people age 62 and older and is insured by the FHA.
There are also proprietary reverse mortgages that we offer to people as young as 55 years old. These are very similar to the FHA insured reverse mortgages. They carry many of the same consumer protections although they are not insured by HUD.
In a reverse mortgage, you maintain your homeownership, but you don't make a monthly principal and interest payment as you do with a traditional mortgage. Instead, the loan gets paid back when the last borrower moves out of the home.
With reverse mortgage loans, the balance goes up monthly instead of down because interest, that you would normally pay to the bank each month, is instead accrued to the loan balance. The loan balance grows because you are not making a payment. Depending on appreciation over time, your net equity may increase or decrease.
After the last borrower leaves the home permanently, the loan must be repaid. The house may be sold to repay the loan, or the heirs may decide to refinance the loan in order to keep the home. Reverse mortgages appeal to many consumers, because of the security and financial freedom they offer, and it is also essential to understand that you have significant rights and responsibilities as the borrower.
Your Reverse Mortgage Responsibilities
In a traditional mortgage, you must make your payment each month. With a reverse mortgage, you do not make a monthly principal and interest payment, but you do still have three primary responsibilities. The goals of these obligations are to protect both your and the lender's investment in the home. As the borrower, you must recognize and meet these responsibilities in order to keep the reverse mortgage from going into foreclosure.
Requirement 1: Your home must be your principal residence.
The home subject to the reverse mortgage must be the one you live in most of the year. You can only have one primary residence at a time, and your reverse mortgage will have limits as to how long you can be away and still call it your primary residence. Generally, you will need to be in your home for 6 months and 1 day of the year. That can be broken up into various timeframes. If you fail to meet the principal residence requirements, the lender can call your loan due. Anyone living in the home who is not a borrower on the reverse mortgage will have to leave the home if the loan cannot be prepaid. Your lender will require you to certify your occupancy once a year via mail.
Requirement 2: You must pay your property charges on time.
Property charges include:
- Your property taxes
- Insurance premiums
- Homeowners' association fees
- Special assessments
- Other costs that make it possible for you to live in the home and protect its value
Just like with a “forward” traditional mortgage, you must pay your property charges in a timely manner, or you may face foreclosure.
Your lender will assess your ability to pay those fees when deciding whether to make the reverse mortgage loan and may require you to set aside money to cover them in the future. Failure to pay these charges can put your loan in default. Reverse mortgage lenders will track payment of these charges through-out the year to insure timely payment.
Requirement 3: You must keep your home in good condition.
As part of the loan qualifications process for reverse mortgage loans, the lender will assess the property to ensure that the condition meets the investor requirements. Once your mortgage is in place, you must keep the home in good condition. General upkeep is the standard. If your roof
leaks, fix it; if the window breaks, replace it. If there is reason for concern, your lender may request an inspection of your property and require repairs but unless there are grave issues, it is up to you to maintain your home. If you do not, this is a default, and the loan may be called due.
If You Cannot Meet the Loan Requirements
Though you don't have a monthly payment to make, you do still have responsibilities. Just like a “forward” traditional mortgage, a reverse mortgage can still end in foreclosure, and you can lose your home if you can't meet the requirements.
Default or foreclosure notices
If you receive a notice of default or foreclosure, you should contact your lender to find out the reason why right away. The key is communication. In most cases, there are ways to avoid foreclosure. Often you can work out the issue with your loan servicer and all is good. You may need to get your original Loan Officer involved to help and they are happy to do so. If you are unable to work things out directly with the servicer, seek counsel from a qualified attorney or counseling agency to understand your options. Remember, immediate communication is the key.
Natural disasters, such as floods, wildfires, or tornados, can damage your home, interrupt your income flow, and cost you money. These things may interfere with your ability to meet your reverse mortgage requirements. If this happens, contact your lender right away to learn about resources that can offer help. Immediate communication is the most important first step. critical.
Paying Back Your Loan
When the last borrower on the reverse mortgage permanently leaves the home, the loan must be repaid. The home will go to your heirs and they will have the opportunity to decide how the loan will be repaid. Most often that is through the sale of the home, and remaining proceeds are then distributed as per your instructions via trust or will. Your heirs can also choose to refinance the home and pay off the loan that way.
Selling Your House
Suppose you want to sell your home while you have a reverse mortgage. The steps that you take are exactly the same as if you had a traditional mortgage. You will contact your Realtor, list the home, open escrow, and find a buyer. When you sell, you will pay back the balance on the reverse mortgage, just as you would with any mortgage you had against your home. This amount will include the amount you borrowed plus interest and fees. The remaining proceeds will be paid to you. There is nothing special about selling your home when you have a reverse mortgage. There are no special rules or regulations that will delay or hamper a sale.
What Happens to Your Loan After You Die
When you die, your reverse mortgage has three possible outcomes.
If you have a co-borrower on your loan
If a co-borrower on the loan is still living in the home, that person can continue to collect the payments, if any, and will continue to enjoy the benefits of the reverse mortgage. The co-borrower can stay for as long as they can meet the requirements of residency, maintenance, and payment of charges.
If a "Non-Borrowing Spouse" lives in your home
If your spouse still lives in the home when you die but is a non-borrowing spouse, they will want to contact the loan servicers right away. Under the FHA program, your NBS will need to provide proof of ownership of the home, along with a copy of the current trust/will, and a death certificate. Keep in mind, the Non-Borrowing Spouse requirements are designed to allow your non-borrowing spouse to stay in the home under the FHA program. The Proprietary programs have different NBS rules which would have been explained to you and your non-borrowing spouse with the assistance of an attorney, at the time your reverse mortgage was originated.
If there is no co-borrower, and no heirs, the lender may move to foreclose on the home. They must recoup the money they lent, plus interest. If there is no one to work with to accomplish that goal, the only alternative would be foreclosure.
Where Can I Learn More?
A reverse mortgage can bring seniors a great deal of peace and improved financial security. These loans do come with responsibilities that borrowers should thoroughly understand. This is your home and your future. Learn for yourself!
Contact Beth Miller-Rowe and The Reverse Mortgage Group team to learn more about whether a reverse mortgage might be right for you. With decades of collective experience in the mortgage industry, they can answer all your questions and help you make an informed decision about what will best accomplish your financial goals and allow you to live your best retirement!
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