Reverse Mortgage
A reverse mortgage, as the name implies, is a type of home loan in which a mortgage lender pays you in installments, rather than you making mortgage payments each month. Reverse mortgages converts the equity that you have built up in your home over the years into cash so you can cover living expenses, medical bills or any other costs. You can also use a reverse mortgage to finance a purchase of a home. Reverse mortgages do not need to be repaid until the borrower no longer occupies the home that is being used as collateral. As such, reverse mortgages are particularly attractive to senior citizens on a fixed income.
Home Equity Conversion Mortgage
Most of the reverse mortgages in the U.S. are Home Equity Conversion Mortgages (HECM), a program created by the Federal Housing Administration (FHA). HECMs have numerous built-in consumer protections that are enforced by law. Other reverse mortgages follow the FHA’s standards for consumer protection as best practices, but they are not obligated by law to adhere to all of them. Some of the protections offered by the FHA include:
- Independent counseling prior to receiving a reverse mortgage is required. The Department Housing and Urban Development (HUD) oversees a network of approved counselors who ensure that you understand the implications and overall costs of a reverse mortgage.
- Both fixed and adjustable rate reverse mortgages are capped. Both are based on the 1-year U.S. Treasury Constant Maturity Rate or the London Interbank Offered Rate (LIBOR), ensuring that the interest rates stay relatively low.
- Origination fees are also capped and may be financed.
- Reverse mortgages have no prepayment penalty or cancellation penalty. Borrowers do not incur penalty fees for paying their mortgage early. Also, you can cancel your reverse mortgage within three days of closing.
- Reverse mortgages cannot be in default or foreclosure. Borrowers are not required to make payments as long as the home is their primary residence. As such, borrowers can never be delinquent on payments and the loan never reaches maturity, even if the borrower outlives the life of the loan.
These are just a few of the important protections offered to consumers through the FHA’s HECM reverse mortgage program. In general, HECM reverse mortgages make some of the safest financial instruments available.
Reverse Mortgage Eligibility
Unlike a second mortgage or home equity loan, reverse mortgages do not require a high income to debt ratio. In fact, you do not need an income at all to receive a reverse mortgage. The amount you can borrow via a reverse mortgage depends on the current interest rate, the appraised value of your home (or FHA’s mortgage limits in your area) and your age. In general, the older you are and the lower the interest rate, the more money you will receive from a reverse mortgage. Furthermore, you do not have to have a good credit rating to receive a reverse mortgage.
To qualify for a HECM loan from FHA, you must be at least 62 years old, occupy the property as your primary residence and not be delinquent on any federal debt.
Receiving Your Reverse Mortgage Payments
Once you close a reverse mortgage, you can receive payments as monthly installments for a set amount of time (term), monthly installments for as long as you occupy the home (tenure), a line of credit or a combination of these options. Each one has its own pros and cons, but choosing one or the other has little effect on how much you or your estate is liable to repay once you leave the house. In general, most borrowers choose a line of credit due to its flexibility.
Repaying Your Reverse Mortgage
As long as you live in your home, you will not be required to make any payments. This is true even if the term of the loan expires. (For example, if you receive a 15 year reverse mortgage and continue to occupy the home for over 15 years.) When you pass away or move out, you or your estate is responsible for paying back the amount owed on your mortgage. This amount will never exceed the value of the home as long as the home is sold to cover the amount owed on the reverse mortgage. If the proceeds of the home exceed the amount of the mortgage, the remainder of the money goes to the borrower or the borrower’s estate.
Obtaining a Reverse Mortgage
You can obtain a reverse mortgage from a commercial mortgage lender or mortgage broker or you can find state-specific information from HUD. But before you begin pursuing a reverse mortgage, you might want to learn more. Check out our reverse mortgage blog posts for answers to all of your questions: