Guide to Reverse Mortgages
How Your Home's Equity Can Enhance Your Lifestyle and Provide Financial Security
- You will retain title to your home
- You will never be required to make a monthly mortgage payment as long as you occupy your home as your primary residence.
- No prepayment penalties. Although the loan is not due and payable until you permanently move out of the home, it can be paid off at any point without any additional fees or costs.
- Neither you nor your spouse can ever be required to leave or sell the home. As long as one of the homeowners continues to occupy the home as a primary residence, regardless of the status of the spouse there is no time limit to how long the remaining homeowner may stay in the home.
- Your home does not need to be free and clear. Elimination of the current mortgage is one of the most common reasons seniors apply for a reverse mortgage.
- You and your heirs retain 100% of the excess equity upon the sale of the home.
Little of the traditional criteria used to qualify for a mortgage applies to a reverse mortgage.
- LIttle or no credit qualifying
- Little or no income or minimum FICO requirements
- Past credit problems normally not an issue
- The qualifications are simple
- The youngest homeowner must be 62 years of age or older
- You must own a home or be purchasing a home that you will occupy as your primary residence
- The home must meet standard FHA appraisal guidelines
Is it Safe?
AARP, the Federal Government, and the National Reverse Mortgage Lenders Association (NRMLA) have worked together to make the reverse mortgage one of the safest, most risk free financial transactions available to seniors.
The concept of a reverse mortgage originated in the mid '70's. During the early years it was unregulated and there were adverse consequences for many seniors.
In 1989, recognizing the incredible financial benefits that this program offers - seniors and AARP asked HUD to take control of the program, eliminate the risks and insure the loan.
Those Safeguards include…
When We Said Safe - We Meant It
1. To eliminate the need to shop for the 'Best Deal' the government regulates:
• Loan Amounts
• Loan Terms
• Loan Fees
2. HUD mortgage insurance guarantees:
That the loan is a non-recourse loan. Federal Regulations mandate that your reverse mortgage is a non-recourse loan. This simply means that under no circumstances can you or any member of your family be held personally responsible for repayment of any part of the debt above and beyond the value of the home at time of repayment. When the home is sold by you or your heirs, if the sale proceeds are insufficient to repay the debt in full the balance due the lender is either forgiven or paid by the government's insurance agency.
A borrower's loan proceeds are secure
No interruptions in servicing
After we present the basic information, you must receive counseling from a HUD approved HECM counselor who will discuss the program and answer your questions.
4. According to the IRS, Reverse Mortgage proceeds are not income and as a result…
• Proceeds are not taxable (consult your tax advisor)
• No effect on Social Security
• No effect on Medicare
• Three day rescission period
How Can I Receive My Money?
- Option One: Lump Sum
- Option Two: Monthly
- Term: You can establish a monthly payment for set period of time.
- Tenure: You receive a fixed monthly payment for as long as you live in the home
- Or a combination.
- Modified Term: Fixed monthly payments for a set period of time, plus access to a line of credit.
- Modified Tenure: Fixed monthly payments for as long as you live in the home, plus access to a line of credit.
What Happens At The End?
Borrowers want to sell
• Property is sold
• Reverse Mortgage principal plus accumulated interest is paid
• Profit goes to the seller
Borrowers want to sell and use another Reverse Mortgage to purchase
• Combine a new reverse mortgage with the profit check from the sale above to purchase a new home.
One Spouse Passes
Both Borrowers Pass
• Estate sells the house
• Reverse Mortgage principal plus accumulated interest is paid
• Profit goes to the estate
A reverse mortgage does not interfere with your right to select to whom you leave your home upon your passing. Once your home is passed to the heirs of your choice, the reverse mortgage comes due. Your heirs may either pay the balance due on the reverse mortgage and keep the home or sell the home and use the proceeds to pay off the reverse mortgage. If they sell the home, all excess proceeds are theirs to keep.
Reverse Mortgages for Home Purchase
The reverse mortgage for purchase program helps homebuyers fulfill their dreams of buying a home without having to worry about affording a monthly mortgage payment. This leaves the homeowner with increased cash flow, additional funds and also provides peace of mind.
Using a Reverse Mortgage to Purchase a Home
Reverse mortgages have always been a great way to turn home equity into tax free funds - without having to make monthly loan payments and with minimal credit score requirement or income verification!
Americans 62 and older can now use the equity from the sale of their previous home, or other cash or savings, to move into a different home -with just a single down payment. With a reverse mortgage you don't make monthly loan payments because the loan is not due as long as you live in your home as your principal residence and you maintain it according to FHA requirements. As with all mortgage loans, the borrower is required to pay their property taxes, homeowners insurance and applicable HOA Dues.
Imagine the financial independence you can achieve by eliminating your monthly mortgage payment. Best of all, if the untapped equity in your home increases over time, you or your heirs still "own" that equity - not the bank, since you retain full ownership of the property.
The Reverse Mortgage Home Purchase Process
Reverse Mortgage vs. Traditional Refinance Loans
Traditional refinance loans allow credit-and-income-qualified homeowners to borrow money and require repayment in the form of monthly payments. With a reverse mortgage, there are minimal income or credit score qualifying restrictions - and payments may be made to you.
Purchasing a home with a reverse mortgage is very similar to purchasing a home with a conventional mortgage, except rather than determining a down payment based solely on the purchase price, the minimum down payment will be based on a factor of your age, interest rates, and the lesser of the home's appraised value, purchase price, or FHA-imposed national lending limit.
Once an offer is accepted, your Reverse Mortgage Specialist will work with the seller or seller's agent to open escrow with a title or escrow agency familiar with reverse mortgages. Reverse mortgage appraisals, inspections, contingencies, documents, and closings are virtually the same as those with a conventional mortgage. Because of the HUD-required independent borrower counseling, some reverse mortgage escrow periods may be slightly longer than those of a conventional mortgage -although this isn't always the case.
Why would anyone want to purchase a home with a reverse mortgage?
The following are some of the benefits of using a reverse mortgage to purchase a home:
- Time to move. People decide to move for multiple reasons: Time to downsize/rightsize
o The home is too big or the yard maintenance is overwhelming
o More convenient location
o People may not want to drive as much and they may want to be near restaurants, grocery stores and medical facilities
o To be near family
o As the years go on, many retirees would like to be near family and enjoy their company, but at the same time have a home they want to go to when they want to "get away"
o The title of the property always remains in the homeowner's name, never changing ownership
o A reverse mortgage is only due when both homeowners pass away, sell the home or both choose to vacate the property. There is a never a prepayment penalty
o A reverse mortgage cannot go into foreclosure as long as the borrowers are fulfilling the requirements of the loan
The basic eligibility requirements to purchase a home with a reverse mortgage are:
- All titleholders must be aged 62 or over
- The purchased home must be your principal residence
- The purchased home must meet HUD's minimum property standards and be either a single-family residence, a residence in a 2- to 4-unit dwelling (one unit must be owner occupied) or an FHA approved condominium
- The down payment must meet FHA guidelines
- You must complete a HUD-approved counseling session
What does it take to get prequalified?
If a borrower has a selected home to purchase, we will need the following information:
- Borrower's name(s)
- Date of birth for all borrowers
- Property address
- Purchase price
- Amount of funds borrower has available for down payment
How do I select a lender?
HUD regulations concerning the terms of a reverse mortgage ensure that lenders operate under similar guidelines. It is not interest rates and fees that distinguish reverse mortgage lenders; it is a depth of knowledge and expertise making the program easy to understand and the process simple.
Cherry Creek Mortgage Company, Inc., through its reverse mortgage division 1st Reverse Mortgage USA, is recognized regionally and nationally as an expert in reverse mortgage lending and is among an elite group of lenders who are authorized by HUD to underwrite, close and fund reverse mortgages.
Frequently Asked Questions
What are the advantages of using a reverse mortgage to downsize and move to a new home? There are no monthly mortgage payments required when you use a reverse mortgage for a new home. There are minimal credit or income requirements and none of the pre-payment penalties that come with traditional forward mortgages.
Is there a credit line to access like other reverse mortgages? Yes, if you choose not to use all of the reverse mortgages funds toward the purchase of your new home.
How should I compare all of my options on financing a new home: "cash down," "traditional mortgage," and "reverse mortgage for moving?" The best way to think through your choices is by asking yourself the following questions: How much money you have? How much money you can afford to have invested in your house? Can you afford to make monthly loan payments? The answers to these questions should help you with making your final decision on what option works best for you.
Who owns the house? You retain full ownership of your house. The title remains in your name.
What fees can the seller pay and what fees must the buyer pay? Allowable fees must be typical for the market. Costs associated with the Reverse Mortgage must be paid by the buyer. Seller cannot pay pre-paid costs. Taxes and HOA dues are paid by buyer on a prorated basis. Seller can only pay the transaction costs such as transfer tax, real estate commissions, title search, and fees typically paid by the seller.
At what point must reverse mortgage counseling be completed? Counseling is required prior to opening escrow or ordering an appraisal.
Is new construction acceptable? Reverse mortgages are permitted on new construction as long as a Certificate of Occupancy has been issued and the property is ready to occupy.
What if borrowers using the Reverse Mortgage for Purchase for a new primary residence, choose to retain their existing home as a rental property? Lenders must ensure the borrower has sufficient income to maintain the costs associated with the new home financed with the HECM for Purchase (i.e.: taxes, insurance, maintenance). The monetary investment for the Reverse Mortgage for Purchase transaction must be satisfied. Borrowers must continue to fulfill any other financial commitments on their existing properties.
How is the down payment determined? The calculation is based on the age of the youngest borrower, the current expected interest rate and the FHA Maximum Claim Amount (the lower of the actual sales price, appraised value or FHA limit).