WHAT IS A REVERSE MORTGAGE?
A reverse mortgage is a federally insured mortgage that allows homeowners age 62 or older to access their home equity in cash, monthly payments, or a growing line of credit.
This financial product is available to only older Americans who have accumulated home equity and now want to use this as their retirement income. Borrowers generally do not have to repay the loan until the last borrower no longer uses the home as his or her primary home. At that time, the home has to repay the reverse mortgage balance within six months.
There are different types of reverse mortgage solutions. However, FHA-insured Home Equity Conversion Mortgage (HECM) is the most popular reverse mortgage. Here, FHA stands for Federal Housing Administration, which is a division of HUD (U.S. Department of Housing and Urban Development).
HECM is the only form of reverse mortgage insured by the federal government. Because of the government’s involvement, lenders often offer these loans with generous financing terms.
There are non-HECM financing products available; the reverse mortgage is used synonymously with FHA-insured HECM product.
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Did you know that senior housing wealth reaches record $7.14 Trillon? 1
Learn how you can use a reverse mortgage for a better retirement.
Meaning Of ‘Reverse’ In Reverse Mortgage
On a traditional mortgage, funds flow from the borrower’s bank account to the lender. On reverse mortgages, funds move in a lump sum or monthly payments from a lender to the borrower.
Most traditional mortgages require principal and interest payments. This decreases the loan balance. Not requiring these payments may cause the loan balance to increase instead.
Since the money and loan balances move in reverse, it is called a reverse mortgage.
Eligibility Requirements for Reverse Mortgage
The most advantageous thing about a reverse mortgage is that there are no overly restrictive requirements. These types of loans are easier to qualify for than other financial products such as home equity loan and mortgage refinance.
Here are the key factors in qualifying for a reverse mortgage in the USA:
The key eligibility requirement for a reverse mortgage is that the borrower is age 62 or older. Since age is counted in whole years, a 69-year-old borrower who will turn 70 within six months of closing is considered 70. The advantage here is that older borrowers generally qualify for higher principal limits.
However, it doesn’t help borrower age 61.5. Borrowers are not eligible to complete the loan process until they officially turn 62.
Following is the list of eligible property types accepted for a reverse mortgage (The list may vary from lender to lender):
- Single family home
- Multi-family home (up to four members)
- HUD-Approved condominium
- Manufactured property that meets FHA requirements
- Planned unit developments (PUDs)
- Modular homes
To qualify for traditional HECM, the borrower must be the homeowner and also have significant home equity. But some homeowners with less equity in their properties can still qualify for traditional mortgages. They will be required to bring funds to closing.
With the HECM for Purchase Program, borrowers become a homeowner to the new property and generate equity in the home by bringing funds to closing. Seniors who have sold a property or liquidated an investment don’t have this problem.
Also, the borrower should be left with a very small amount the existing mortgage to repay.
The home must be the primary residence of the borrower. You can’t get a reverse mortgage on a second home or investment properties. Lenders verify your residency at the time of origination. However, the reverse mortgage program also requires an annual certificate confirming that the borrower will reside in the home. Also, the property should be in good condition before applying for the reverse mortgage
Non-Recourse LoanThe non-recourse loan is the most powerful aspect of reverse mortgage solutions. It states that the homeowner is not responsible for mortgage debt accruing beyond the value of the home. It gives the homeowner peace of mind their heirs will not have to pay their debts. FHA guarantees that neither the mortgage borrower nor their heirs will owe more than the home’s value at the time the house is sold.
Difference Between a home equity loan and reverse mortgage
Unlike a Home Equity Line of Credit (HELOC), borrowers do not make monthly mortgage payments. However, they must pay insurance and taxes on the property using the proceeds from the reverse mortgage loan. Also, they must continue to use the property as their primary residence for the life of the loan. Many seniors use the remaining proceeds to pay their medical expenses, make home repairs, or save cash for an emergency.
Moreover, the lender cannot reduce the reverse mortgage line of credit. The unused portion of the line of credit grows over time.
To determine the amount you can borrow with a reverse mortgage, you can use a reverse mortgage calculator that considers the current interest rate, the age of the youngest borrower and the home’s appraised value.
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¹ Senior Housing Wealth Reaches Record $7.14 Trillion. NRMLA. Historical RMMI.