What Is a Reverse Mortgage?
A reverse mortgage is a type of loan that allows certain homeowners to take cash out of the value of their house. The loan doesn’t have to be repaid until the last surviving borrower leaves the home or fails to maintain the terms of the agreement, such as paying property taxes and performing maintenance on the property. The homeowner does not have to make any monthly mortgage payments to a reverse mortgage lender but may voluntarily do so. Different types of reverse mortgages are available. The two most common are the Home Equity Conversion Mortgage or HECM loans and the jumbo reverse mortgage specifically for homes with a high value.
The homeowner can choose from different payout methods to receive their money. There is no right or wrong plan. The reverse mortgage professional should explain all of the different options so that the homeowners can make the best choice for themselves.
- Tenure payouts come in equal monthly payments.
- Term payouts provide equal monthly payments for a set number of months. The borrower chooses how many payments that will be.
- A line of credit lets the borrower take out installments or varying amounts at different times. Again, the borrower sets the schedule.
- A modified tenure plan combines monthly payments with a line of credit.
- A modified term combines monthly payments for a set number of months with a line of credit.
How much money you can take out of your home’s equity varies based on many factors. Most lenders consider the age of each borrower on the title, the interest rate, and the appraised value of the property. For example, older homeowners with a home with a high value usually qualify for more than a younger person with a home of the same value and the same interest rate. Also, most lenders limit how much money you can take out in the first year. Your reverse mortgage professional should walk you through all of these calculations, so you know exactly what to expect.
What Are the Requirements to Apply for a Reverse Mortgage?
Because these reverse mortgage loans serve a specific kind of borrower, you must meet some basic reverse mortgage loan eligibility requirements to be eligible. Regulations also apply to the property that is the subject of the reverse mortgage. Finally, the mortgage company you work with must be licensed to offer reverse mortgages in the state where you live. Keep in mind that these are the minimum requirements, and each lender may have additional steps to complete.
The homeowners on the title of the property must meet certain requirements:
- At least one homeowner on the title to the home must be at least 62 years old.
- The borrower(s) must live in the home that is subject to the reverse mortgage loan, and it must be their primary residence.
- The homeowner should have enough equity in your home to make a reverse mortgage loan beneficial. How much is enough varies based on your situation. A competent reverse mortgage professional can help you determine what that number should be for you. Generally speaking, you need at least 50% equity so that you can pay off the existing mortgage and still have cash to take home.
- Before closing, you must complete a counseling session, either in person or by phone, with a Reverse Mortgage Counselor approved by HUD. Your mortgage professional can give you a list of these counselors in your area.
- If you are applying for an HECM loan, you need a financial assessment to satisfy the lender that you can keep up the obligations to pay property taxes and insurance and maintain the property.
- At the closing of your reverse mortgage, you must pay off any mortgage balance you have, along with any other obligations against the property. You may use funds from the reverse mortgage, but funds can come from other sources as well.
The property in question must meet certain qualifications as well.
- The house must be a single-family home, a two to four-unit complex that you own and live in as your primary residence, a condominium approved by HUD, or a manufactured home approved by FHA.
- You must meet the financial eligibility set forth by the Department of Housing and Urban Development or HUD.
- The property must meet minimum standards defined by the Federal Housing Administration or FHA. If you need to make repairs to meet those standards, you may be able to use some of the funds from the reverse mortgage for that purpose.
Where Can I Learn More?
To learn more about how a reverse mortgage might be able to help you meet your goals for the future. We meet with you face to face to help you understand every step of the process and make sure you have all the information you need to make an educated decision. Since 2008, Beth Miller-Rowe and her team have been helping seniors with reverse mortgages to improve financial security in retirement. Every interaction is guided by respect for you and your family, honesty about the pros and cons of reverse mortgages, and sensitivity to your particular situation. Contact us today and let us help you take away some of the financial worries associated with retirement. You can always reach out by calling (925) 969-0380.