How a Reverse Mortgage works
Reverse mortgage loans are a way for homeowners 62 or older to convert their home’s value into cash or monthly payments without having to sell or move. Insured by the FHA Mortgage Insurance program, the Department of Housing and Urban Development (HUD) allows these Homeowners to either borrow against the equity of their homes or purchase a new home based on the value or purchase price of that new property.
- Qualifying homeowners can choose to receive generally tax-free payments from reverse mortgage lenders either on a monthly basis, in a lump sum, or as a line of credit.
- Income, assets and liabilities will be verified.
- No repayments are required as long as at least one borrower lives in their home as well taxes, insurance and HOA dues are paid on time and the home is maintained in good condition.
- Social Security and Medicare benefits are not affected.
- Reverse mortgage lenders recover the loan amount, plus accrued interest and mortgage insurance when the last homeowner passes away, chooses to sell the home or a family member chooses to purchase the home (for more details contact me).
- When the loan is paid in full, all remaining equity associated with the property will be distributed to your heirs.
- Single Family One-Unit Residences
- 2-4 Unit Owner-Occupied Residences
- Manufactured Homes
- The age of the youngest borrower
- The appraised value of the property and current interest rates
- Income, assets and liabilities will be reviewed
- Monthly income for a fixed term, or life
- Line of credit
- Lump sum
- Any combination of the above 3
Here’s how it works:
Keep in mind:
Reverse mortgage borrowers continue to own their homes. Because there are no monthly loan payments due (homeowners must keep property taxes, insurance and HOA dues paid current), the loan balance grows over time, meaning the remaining equity in the home decreases but your home value continues to increase.
Borrowers must continue to pay homeowner’s insurance and property taxes during the loan period. It is also the borrower’s responsibility to keep up with repairs. In fact, if a borrower fails to adhere to any of these obligations, it may become immediate cause for the loan to become due. In which case, it would become payable in full.
You must be age 62 or older (in Texas if married, both borrowers must be 62 or older.) You must occupy the home as your primary residence – for the majority of the year. Borrowers must own the home outright or have a low enough balance on the existing mortgage that it can be paid off from the proceeds of the reverse mortgage.
In Florida, proceeds will be based on the youngest borrower even if under the age of 62. Non-borrowing spouses under 62 must apply for the reverse mortgage loan, attend a HUD counseling session. In all states the HUD counseling is either handled in person, or over the telephone by a HUD counselor.
Does my home qualify for a reverse mortgage?
First of all, your residence must meet HUD property standards. The reverse mortgage must also be the only mortgage or lien held against the residence. That means that if there is a current mortgage or lien on the property, it may be able to be paid off with the proceeds of the reverse mortgage.
Examples of qualifying homes:
Ask your lender if these residences qualify:
How is the loan amount determined?
The amount of the loan is based on:
What are my reverse mortgage options?
HECM — The Home Equity Conversion Mortgage (HECM) is the only reverse mortgage that is insured by the Federal Housing Administration (FHA). The FHA guarantees that HECM lenders meet their obligations, governs how much HECM lenders may loan to qualified borrowers, and limiting loan costs. Because this is a government insured program, loan counseling is required, by an approved HUD counselor.
HECM offers 4 draw options:
Equity Available by Age
|Age of Borrower||Percentage range of equity available through a reverse|
How do I apply?
These basic steps describe the application process.
Your application begins the process with the lender. It specifies fees, interest rates, loan amounts, and more.
At this point you will begin collection the documents required to be approved for the Reverse Mortgage. These may include such things as: mortgage statements, homeowners insurance, survey of your home, bank statements, ID’s, paystubs or other proof of income and tax returns.
Reverse Mortgage Counseling
Your lender is not allowed to proceed until you complete mandatory counseling with a HUD-approved counselor. List of approved agencies are available from the lender or online at www.hud.gov.
In order to proceed, you will need to know the market value of your property through an FHA-approved appraisal that the lender will order.
For underwriting, legal ownership is confirmed in a title search. If someone remains on the title that no longer lives in the home or is deceased, additional paperwork may be required to clear title. The underwriter will also review the appraisal, the financial assessment and insure the loan is in the best interest of the borrower and the lender.
At closing, all aspects of the loan are reviewed and signatures obtained on final loan documents with a notary and after a three day waiting period you will receive the money, or proceeds, from your reverse mortgage. On a Purchase, the loan will fund the same day. On a Refinance, you can choose to receive the payment in one of three ways: as a lump sum, as a monthly payment or as a line of credit. Then it’s up to you: pay bills, fix up the house, help a family member, or use the money to enjoy your life.