What is a Reverse Mortgage?
A reverse mortgage is a government insured loan program that allows senior homeowners to convert a portion of the equity in their home into usable cash.
There are no tax consequences*, you do not forfeit any of your rights as the homeowner, you or the heirs of your choosing decide when or if the home is to be sold, and when the loan is repaid 100% of the remaining equity belongs to you, your heirs or your estate.
The concept is simple. You have spent years building equity in your home by paying off (or paying down) your mortgage, and through the appreciation in your home's value. A reverse mortgage simply allows you to withdraw a portion of that equity, use it any way that you like, stay in your home for as long as you like, and when you are ready to sell your home, or you have passed, the loan is repaid.
Important Facts about Reverse Mortgages
- The U.S. Department of Housing and Urban Development, or HUD, established reverse mortgages to help seniors who are homeowners pay for their living expenses and rising medical costs.
- To qualify for a HUD reverse mortgage you must be at least 62 and either own your home outright or have only a small balance left on your current mortgage.
- A reverse mortgage allows qualified homeowners to borrow money against their home's equity.
Traditional mortgages are based on the homeowner's ability to make monthly payments and for this reason things like credit, employment, income, and other assets are considered in the qualification process. A reverse mortgage does not require any form of monthly repayment and therefore none of those factors are considered. There are three basic requirements to qualify for a reverse mortgage:
- The youngest homeowner must be 62 years of age or older,
- The home must be your primary residence, and
- The type of home and condition of the property must meet standard HUD guidelines.
* Consult your tax advisor
Benefits of Reverse Mortgage
A Reverse Mortgage can provide many benefits for seniors including the ability to stay in their home. Because seniors often do not have the income to qualify for traditional home equity lines of credit, they are unable to access the wealth they had accumulated in their homes without selling the property and relocating. Reverse mortgage critics often tell seniors to sell their home and relocate.
But why should they not have the opportunity to stay in their home?
It is common for seniors to have trouble finding affordable housing without moving far from their support network. Reverse mortgages are designed to help people manage their personal finances, while affording a senior, who wishes to age in their home, the chance to do so.
A Reverse Mortgage May Be The
A reverse mortgage enables older homeowners (62-plus) to convert part of the equity in their homes into tax-free cash without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is "reversed." Instead of making monthly payments to a lender, a lender makes payments to you. The homeowner does have a few important obligations with a reverse mortgage, including paying property taxes, insurance and any HOA dues, as well as maintaining normal and customary upkeep of the property.
The funds you are eligible to receive depends on your age (or the age of the youngest spouse in the case of couples), the appraised home value, interest rates. In general, the older you are and the more valuable your home, the more money you receive.
The Benefits of a Reverse Mortgage include:
1. No Monthly Mortgage Payments: Instead of making monthly mortgage payments to a lender, as with a regular first mortgage or home equity loan, a lender may make payments to you.
2. Non Recourse: Reverse mortgages are "non recourse" which means that no matter how high the loan balance grows, neither the borrower nor their heirs will ever owe more than the home's market value.
3. Stay in Your Home: The home does not have to be sold to pay off the loan. You (or your heirs) can pay off the reverse mortgage and keep the home. There are no prepayment penalties.
4. Estate Planning: If the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you, your heirs or your estate.
5. Available Cash: The amount of cash available from a reverse mortgage depends upon your age at the time you apply for the loan, current interest rates and the type of reverse mortgage you choose.
6. Safety: Reverse mortgages are very safe since you do not give up home ownership and do not owe more than the value of property at the time the loan is repaid. Reverse mortgages allow you to withdraw money from your home equity, tax-free, with no requirement that it be repaid until you pass or no longer live in the home as a primary residence.
Reverse Mortgage Process
Below is the process for starting and learning about how Reverse Mortgages work.
1. Reverse Mortgage Awareness
Homeowner learns about the Reverse Mortgage program.
2. Reverse Mortgage Action
If necessary, homeowner seeks additional information and documentation by contacting 1st Reverse Mortgage USA or a Reverse Mortgage loan officer, HUD, Fannie Mae, AARP, NCOA (National Counsel of Aging), or the National Center for Home Equity Conversion.
3. Reverse Mortgage Counseling
Homeowner seeks counseling from a local HUD-approved counseling
agency, or a national counseling agency, such as AARP, National
Foundation for Credit Counseling, or Money Management
International. Counseling is required for all reverse mortgages and
may be conducted face-to-face or by telephone.
By law, a counselor must review (i) options, other than a reverse mortgage, that are available to the prospective borrower, including housing, social services, health and financial alternatives; (ii) other home equity conversion options that are or may become available to the prospective borrower, such as property tax deferral programs; (iii) the financial implications of entering into a reverse mortgage; and, (iv) the tax consequences affecting the prospective borrower's eligibility under state or federal programs and the impact on the estate or his or her heirs.
4. Reverse Mortgage Application
Homeowner fills out loan application and selects payment option: fixed monthly payments, lump sum payment, line of credit, or a combination of these. Lender discloses to homeowner the estimated total cost of the loan, as required by the federal Truth in Lending Act. Lender collects money for home appraisal. Homeowner provides lender with required information, including photo ID, verification of Social Security number, copy of deed to home, information on any existing mortgage(s) on property, and counseling certificate.
5. Reverse Mortgage Processing
Reverse Mortgage Lender orders appraisal, title work, lien payoffs, etc. An appraiser comes to your home. The appraiser assigns a value to the home and determines the physical condition of the property. If the appraiser uncovers structural defects that require repair, the homeowner must hire a contractor to complete the repairs after the Reverse Mortgage closes.
6. Reverse Mortgage Closing
Following approval, closing (signing) of loan is scheduled. Closing papers and exact figures are prepared. Closing costs are normally financed as part of the loan.
7. Reverse Mortgage Disbursement
Homeowner has three business days after signing papers in which to cancel the loan. Upon expiration of this period, the loan funds are disbursed. Homeowner accesses the funds in the form of the payment option selected. Any existing debt on the home is paid off. A new lien is placed on the home. The homeowner may use the loan proceeds for any purpose. During the life of the loan, the loan "servicer" disburses monthly payments to the homeowner (if this option is chosen), advances line of credit funds upon request, collects any repayments on the line of credit, and sends periodic statements.
12 Things You Should Know
1 Government regulations require that all reverse mortgage lenders operate under the same guidelines. This assures borrowers that as long as they are using an approved lender and obtaining an FHA insured reverse mortgage, the loan will have all the consumer protections required in this program.
2 It is of paramount importance that you understand the details of the program, as you will need to make some decisions along the way. Meeting with someone you know and trust will assure a smooth transaction, and you can feel confident that all your questions are being answered so that you can make informed, educated decisions.
3 We recommend that you select a lender whom you know and trust. Ideally, an experienced lender who can assure you the greatest depth of knowledge, and one whose expertise will make the program easy to understand and the process simple. As a member of the 1st Reverse Mortgage USA Lender Network®, you can be confident that we have the best possible resources to assure your transaction is completed timely, accurately and professionally.
4 With very few exceptions, you should never be made to feel there are deadlines that must be met. This is an outstanding program, and once you decide it is right for you, helping the lender expedite the transaction is in your best interest.
5 While you should never feel you are being pressed to proceed before you are ready, you should also make sure the advice and guidance you are receiving about this program is from people who are knowledgeable about the facts of the program. Many well-meaning family members, friends and professionals may offer advice, but if their understanding about the program is not based on the facts, you may be misguided or make a wrong decision. Please feel free to use us as a resource to help you confirm any information you are getting about this program-regardless of the source.
6 A reverse mortgage gives you access to a portion of the equity in your home. You decide the amount of available funds to draw, and interest is assessed only against what you draw-when you draw it. Funds that you do not draw remain as equity in your home. When you draw funds, you are not required to make a monthly repayment of the equity or interest. When you or your heirs sell the home, the equity you drew and the interest that accrued will be deducted from the sale proceeds and all remaining profit from the sale is yours or your heirs.
7 All costs associated with your reverse mortgage must be disclosed to you in detail. All fees, including upfront fees and any recurring fees over the life of the reverse mortgage, will be added to the final payoff. If you should ever desire to make a partial or full repayment of this loan, you may do so without penalty.
8 Depending on the Loan Program you choose, you may have sole discretion as to how you draw your funds.
9 Unlike a traditional mortgage, because you are not required to make a monthly payment on your loan, the lender cannot foreclose on your home for nonpayment.
Your requirements in this loan program are:
1. At least one of the borrowers must occupy the home as their primary residence;
2. You must keep your property taxes current;
3. You must keep current and adequate homeowner's insurance on your home (in the case of a condominium or townhouse, keep your HOA dues current); and,
4. Perform whatever routine maintenance is necessary to keep your home in good repair so as to not lose eligibility for your homeowner's insurance.
10 If the appraiser determines you have any urgent repairs that HUD requires as a condition of the loan, funds from your reverse mortgage can be set aside to make those repairs, and those repairs can be made in the months following the closing.
11 Your eligibility for this loan is not based on your credit rating. However, if you have any outstanding judgments that have been filed against you or your property, those judgments may need to be paid at closing. Reverse mortgage proceeds may be used to pay these obligations.
12 If your property is currently in a trust, you will need to provide a copy of your trust documents. If the terms of the trust are in accordance with HUD guidelines, the loan may close in the name of the trust. If the trust is not in accordance with HUD guidelines, you may need to amend the trust or remove the home from the trust.
10 Simple Steps
STEP 1: The first, and most important step is education and fact finding. This is a very important step because it will dispel the many misconceptions you, your family and/or your trusted financial advisors may have about the program. It will also help you understand your options and give you the peace of mind to proceed with confidence. As a member of the 1st Reverse Mortgage USA Lender Network®, we have access to the resources our clients need to answer any and all questions about this government-insured program. Please do not hesitate to let us know how we can be of assistance.
STEP 2: Once you are satisfied that a reverse mortgage could be a solution to your financial needs, we will provide you with a list of the HUD-approved reverse mortgage counselors in your area. As a safeguard, prior to proceeding with your transaction, HUD requires that you meet with a counselor for approximately one hour to once again review all the information about a reverse mortgage. You have the option for any family members you choose to accompany you to this meeting; however, the lender may not attend with you. The counselor will provide you with a Certificate of Counseling which is our permission to proceed with your reverse mortgage. If completing your counseling by phone is better for you, we will provide the information you need to make those arrangements.
STEP 3: When you inform us that you have received your Counseling Certificate, we will arrange for you to complete a loan application and provide copies of a small number of support documents.
STEP 4:Upon completion of your loan application, FHA will assign a case number to your loan; title insurance will be ordered; and an appraiser will contact you to make an appointment to view your home. If your home is a HUD code manufactured home, certain intermediate steps may be necessary.
STEP 5:Once the processing center has received your signed loan application with attachments, the appraisal, and title information, your loan will be sent to underwriting for review. Because you are utilizing a member of the 1st Reverse Mortgage USA Lender Network® to arrange your reverse mortgage, your file will be processed and underwritten at the same location. Unlike other reverse mortgage lenders who must send your file to another state for underwriting, your personal information will be more secure with us, and the time necessary to approve your loan for closing will be substantially reduced.
STEP 6:Once we satisfy all underwriting requirements, the underwriter will give us a "Clear-to-Close" notification. This is our permission to set a date and time for your closing. Prior to closing, we will once again review the options of how you would like to structure your reverse mortgage funds. Your loan will close based on your instructions.
STEP 7:At closing, the closing agent will review all the documents with you as you sign. You will be given a copy of all documents, and an informational booklet about the company who will service your loan. This will include information about how you receive your funds, and the statements you will receive each month. Federal regulations state that you have three banking days following the day of closing to review all your documents. If, during that three-day period, you decide for any reason that you would prefer not to complete your loan, you have the right to cancel the transaction at no cost to you.
STEP 8:Following the three-day rescission period, the title company will pay off any existing mortgages, disburse to you any funds that you had requested as an upfront draw on your proceeds, and record the transaction with the county. Your file will be set up with the Servicing Agent, and in the following month you will begin receiving your monthly statements. Your reverse mortgage proceeds will be available to you based on your choice of how you wanted to receive the funds.
STEP 9:Now that your loan is closed, your only obligations are:
• At least one of the borrowers must occupy the home as their primary residence;
• You must keep your property taxes current;
• You must keep current and adequate homeowner's insurance on your home (in the case of a condominium or townhouse, keep HOA dues current); and,
• Perform whatever routine maintenance is necessary to keep your home in good repair so as to not lose eligibility for your homeowner's insurance.
STEP 10:Sit back and enjoy peace of mind knowing you have enhanced your financial security without having to relinquish any of your rights as a homeowner, and without placing yourself, your home or any member of your family at any financial risk. All costs associated with your reverse mortgage must be disclosed to you in detail. All fees, including upfront fees and any recurring fees over the life of the reverse mortgage, will be added to the final payoff. If you should ever desire to make a partial or full repayment of this loan, you may do so without penalty.
With some Loan Programs, you will have sole discretion as to how you draw your funds. You will declare your choice just prior to closing your reverse mortgage. Should you ever need to change the way you are receiving your funds, you may request a change at any time.
Frequently Asked Questions
Excerpted from U.S. Department of Housing and Urban Development
The Home Equity Conversion Mortgage (HECM) is FHA's reverse mortgage program which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more.
1. What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence or fail to meet the obligations of the mortgage. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
2. Can I qualify for FHA's HECM reverse mortgage?
To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan. You can find a HECM counselor online or by phoning (800) 569-4287.
3. Can I apply if I didn't buy my present house with FHA mortgage insurance?
Yes. It doesn't matter if you didn't buy it with an FHA-insured mortgage. Your new FHA HECM will be FHA-insured.
4. What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
5. What's the difference between a reverse mortgage and a bank home equity loan?
With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home, sales price or FHA's mortgage limits, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you may borrow.
With a HECM, you don't make monthly principal and interest payments, the lender pays you according to the payment plan you select. Like all homeowners, you still are required to pay your real estate taxes, insurance and other conventional payments like utilities. With an FHA HECM you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."
6. Will I still have an estate that I can leave to my heirs?
When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.
7. How much money can I get from my home?
The amount you can borrow depends on:
* Age of the youngest borrower
* Current interest rate
* Lesser of the appraised value of your home, the HECM FHA mortgage limit for your area or the sales price
* The initial Mortgage Insurance Premium (MIP) option you choose (2% HECM Standard option or .01% HECM Saver option)
You can borrow more with the HECM Standard option. Also, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow. If there is more than one borrower, the age of the youngest borrower is used to determine the amount you can borrow. For an estimate of HECM cash benefits, select an online calculator from the HECM Home Page.
8. Should I use an estate planning service to find a reverse mortgage?
FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA lender. FHA provides this information free, and HECM housing counselors are available for free or at very low cost, to provide information, counseling, and a free referral to a list of FHA-approved lenders. Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you.
9. How do I receive my payments?
You have five options:
* Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
* Term - equal monthly payments for a fixed period of months selected.
* Line of Credit - unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted.
* Modified Tenure - combination of line of credit with monthly payments for as long as you remain in the home.
* Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
Reverse Mortgage Myths
"A reverse mortgage is similar to a home equity
FALSE. Home equity loans have qualifying requirements relative to credit score that a reverse mortgage does not. A home equity loan will require that you make regular monthly payments.
"I could get forced out of my home."
FALSE. FHA/HUD reverse mortgages specifically state that you cannot be forced out of your home. The only requirements of a reverse mortgage are that you continue to keep your home as your primary residence, in a good state of repair, with property taxes paid and insurance coverage in place.
"The bank will assume ownership of my home if I get a
FALSE. The borrower retains title to the property. The reverse mortgage lender is merely extending a loan to the borrower secured by the home / property. Because ownership of the home is retained, the borrower is responsible for the payment of property taxes, insurance and home maintenance.
Myth: "I can't qualify for a reverse mortgage if I have an existing mortgage, or other real estate secured debt."
FALSE. Even if you have an outstanding first mortgage, or some other real estate liens (i.e. a home equity loan, tax lien, etc.), you still may qualify for a reverse mortgage. The proceeds of the reverse mortgage must first be used to pay off such debts however. This is a significant benefit as many borrowers use a reverse mortgage loan simply to eliminate their mortgage or home equity loan payments.
Myth: "Having a reverse mortgage will require I make monthly payments."
FALSE. You are not required to make monthly mortgage payments on your reverse mortgage. When you sell your home, when it is no longer your primary residence, or when your estate is settled, the loan must then be repaid.
Myth: "My heirs won't inherit my home."
FALSE. Your estate will only owe the balance of the reverse mortgage. If, for example, you obtained a reverse mortgage and owed $25,000 after 5 years, then decided to sell the house for $200,000, the lender would be repaid the $25,000 and you or your heirs would receive $175,000.
Myth: "My Medicare and Social Security benefits will be affected by a reverse mortgage."
FALSE. Reverse mortgage payments should not affect Medicare or Social Security benefits. Additionally, reverse mortgage payments should not affect Social Security Income (SSI) benefits or eligibility as long as any reverse mortgage advances are spent within the month they are received (Consult your Social Security, Medicare or other financial advisor to determine how reverse mortgage payments may affect your particular situation).
Myth: "I'll have to pay taxes on the money I receive from a reverse mortgage."
FALSE. Reverse mortgage funds are considered loan proceeds and are therefore not taxable income. (Consult your tax advisor).