What is a Reverse Mortgage?
A Reverse Mortgage is a loan that unlocks a portion of the equity in a senior's home and converts it to cash that can be used for any reason. The main advantage of a Reverse Mortgage is there are no mandatory monthly payments*. To qualify, a single borrower or the youngest borrower of a married couple, must be 62 or over.
The amount a person qualifies for depends on the age of an individual or the age of the youngest spouse of a married couple and the results of a financial assessment to ascertain whether a set aside is required based on financial history. The property must be the primary residence.
You may also hear or see the term HECM (Home Equity Conversion Mortgage) which is an FHA insured Reverse Mortgage. Although there are new proprietary "jumbo" loans available for higher valued homes, most home buyers and people looking at Reverse Mortgages are thinking of FHA insured HECM loans.
A Reverse Mortgage is a lien on a property just like any other real estate loan. The lender is not on title. The maximum property value recognized for an FHA insured Reverse Mortgage is $679,650. Even if the property appraises higher, the amount a senior qualifies for will be based on $679,650. A Reverse Mortgage is paid back when the last borrower leaves the home – either when they move or when the last borrower dies.
The Reverse Mortgage is a non-recourse loan, which means if the balance exceeds the home value at death heirs don’t owe the difference. Heirs have 6+3+3 (12) months to pay the loan off after death. The loan can be refinanced if the heirs wish to keep the home or the balance can be paid off from proceeds of a trust/probate home sale. Heirs can buy the home at 95% of appraised value.
ELIGIBILITY
Age
Borrowers must be 62 years of age or older.
Recent program changes now allow for younger, non-borrowing spouses to remain in the home and defer repayment after the borrowing spouse passes away and refinancing is not a viable option.
New proprietary (non-HECM) Reverse Mortgages currently lower the qualifying age to 60 and over.
Income
Although not required to make principal and interest payments, prospective buyers must show the willingness and ability to pay the property charges for the new home. Property charges may include: property taxes, homeowner’s insurance, HOA dues, maintenance costs, or any other required property fees.
When prospective buyers intend to retain an existing home as a rental property, they must have enough income to pay the recurring property charges on both homes.
Repairs
Any major property deficiencies that threaten the health and safety of the homeowner and/or jeopardize the soundness and security of the property must be repaired by the seller prior to closing. Examples include: no running water, leaking roof, no primary heating source, inadequate electrical system (including lighting), inoperable doors and window, state or local code violations.
Counseling
All borrowers and non-borrowing spouses must receive HUD approved counseling. Family members and trusted advisors are also encouraged to attend.
Principle Residence
HECM mortgagors must occupy the subject property as their principal residence within 60 days from the date of loan closing.
Property Types
Only properties where construction is completed and a certificate of occupancy or its equivalent has been issued are eligible.
- 1-4 Unit Single Family Homes
- HUD approved Condominiums
- HUD approved Manufactured Homes
To protect potential borrowers from purchasing a distressed home in need of substantial repairs but being sold at or above market rate, or schemes involving temporary rental arrangements, there are special program requirements
How much funds are available?
Available funds are determined using a calculation that takes into consideration the following: property value (up to FHA mortgage limits), principal limit factors (predetermined ratios set by HUD), age of the youngest borrower or non-borrowing spouse, and expected interest rate.
There are fixed and variable interest rate options available. Proceeds are available as a fixed sum, monthly payments and/or a Line of Credit (LOC).
