A reverse mortgage is a loan product that allows senior homeowners to convert their home equity into cash.

It was created to provide an option for older borrowers, who because they are living on a fixed income, can’t qualify for a conventional cash out mortgage or don’t want to have to make a monthly mortgage payment.

The idea behind this loan is to allow older people, whose major or only savings is represented by the equity in their home, the ability to stay in their home and access that equity.

Most reverse mortgages are provided by the Federal Housing Administration (FHA), as part of its Home Equity Conversion Mortgage (HECM) program.

Commentary

Most people feel an affinity for their homes after nearly a lifetime of shared experiences. I think of this as a loan product which allows your Home to pay you back for all of the time and money you have invested in it.

Description texThe fact is that many older Americans don’t have sufficient retirement income or savings to make either payments on a mortgage or cover living expenses. They have paid off their home but now can’t afford to live there.

The Program helps those who can’t qualify for a standard mortgage because their income is too low to qualify. The problem is you cannot access the equity unless you sell the home or have enough income to qualify for a 1st mortgage or a Home Equity Line of Credit. Qualifying can be impossible for people living on a fixed income.

The Reverse mortgage allows seniors the option of using their savings as represented by their home equity to make the mortgage payments for them.

Commentary

Because it could change your life! This loan solves some of the problems that older people face today. The days of big pensions are gone and for most people the challenge of meeting monthly expenses is uncomfortably squeezing them in their retirement. Many people have a large portion of their wealth tied up in their homes. The only problem is that they can’t access it without having a payment or selling the home and then having a new monthly housing expense. They have a home but can’t afford to live there. This loan could make a major difference in their quality of life.

Borrower Requirements. You must:

Be 62 years of age or older.

Own the property outright or have equity.

Occupy the property as your principal residence.

Not be delinquent on any federal debt.

Have a 24-month history of timely payment of real estate taxes, hazard and flood insurance premiums.

Participate in a consumer information session given by a HUD- approved HECM counselor

Property Requirements.

Single family home or 2-4-unit home with one unit occupied by the borrower

HUD-approved condominium project

Manufactured home that meets FHA requirements

Financial Requirements

Since borrower’s are not required to make mortgage payments and the lender does not escrow for ongoing property charges such as property taxes, insurance and Homeowner Association fees, etc…borrower(s) are required to meet a minimum residual income level to pay for monthly living expenses

There are no minimum credit score requirements to qualify for a reverse mortgage loan.

Commentary

It used to be that anyone could qualify if you owned a home and were over 62. You didn’t have to prove any income. That policy proved to cause too many problems. Now, you are asked to prove that you have the positive cash flow to pay your taxes and homeowner’s insurance bills. This is because the lenders don’t have an escrow account in order to pay it for you. If this is an issue for you there are other possible ways to still do the loan.

Besides being able to cover those expenses you need to prove that you are a good credit risk by having a clean 2 year history of any housing expenses.

W Copy of your driver's license or other picture ID

Copy of your social security card

Copy of your Homeowners Insurance Policy Declaration Page

Copy of your Mortgage Statement(s) (need all if any)**

Social Security or Pension Awards Letter

Commentary

You will need a lot less documentation than with a conventional forward mortgage since you are not getting qualified on the monthly mortgage payment as none is required.

Your home, not your promise to make payments is the collateral for this loan so they will want to document carefully that it is in good shape and protected.

Under some conditions you might have to submit tax returns or W2s 1099s etc.

The amount you may borrow will depend on several factors :

● Age of the youngest borrower or eligible non-borrowing spouse

● Current interest rates

● The Lesser of:

● The property’s appraised value

● The FHA mortgage limit of $970,800

● The sales price (only applicable to HECM for Purchase)

Other influencing factors are the mortgage option (Fixed rate vs Adjustable) and method of disbursement (Scheduled withdrawals vs Line of Credit) selected. As a rule of thumb the loan to value (LTV) offered on a reverse mortgage is 40-70% of your appraised value, depending on your age and current interest rates.

Commentary

Most loan amounts straddle the 50% range of the home’s appraised value. They can range from 40% to 70%. The crucial component is the age of the youngest borrower. The younger you are the less money you will qualify for since you will be expected to live longer than someone in their late 80s. So the younger person will have a longer period of either drawing on money or not making mortgage payments.

The type of interest rate program, fixed rate vs adjustable rate will also affect the loan amount.

No, the bank does not own your home. You retain the same ownership and title that you have today. The reverse mortgage is just a loan like any other type of mortgage but with the extra ability to defer the interest charges rather than making mandatory monthly repayments.

Commentary

At any time, you may repay the interest, refinance, or sell your home without penalty. You will always receive a monthly statement that will outline your interest charges and available line of credit activity. At the end of the day FHA is the entity who is insuring your loan for your lifetime. Because of the national MIP fund, you are guaranteed that if a lender should go out of business in the future your loan will be transferred to another servicer and honored for your lifetime. Your line of credit will always be made available to you and you can stay in your home providing that you continue maintaining your property tax and insurance, regardless of how long you live or what your home value appreciates.

You can pay for most of the costs of a HECM by financing them and having them paid from the proceeds of the loan. Financing the costs means that you do not have to pay for them out of your pocket. On the other hand, financing the costs reduces the net loan amount available to you.

You will be charged an initial mortgage insurance premium (MIP) at closing.

1. Mortgage Insurance Premium

You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan. The initial MIP will be 2%. Over the life of the loan, you will be charged an annual MIP that equals 0.5% of the outstanding mortgage balance.

2. Third Party Charges

Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.

3. Origination Fee

You will pay an origination fee to compensate the lender for processing your HECM loan. HECM origination fees are capped at $6,000.

Commentary

This is a more expensive loan than a conventional loan. It carries more cost because it carries more risk since the borrower is not qualifying to repay the loan. In some ways it is a gamble by the lenders that there will be enough equity in the property to pay them off when the loan is called.

Most of the cost is the Mortgage Insurance premium that FHA collects. They are the ones who will have to make up any losses that the lending bank incurs. They charge 2% of the appraised value of the property.

The good news is that you can roll those costs into the loan.

Reverse mortgage payments can be received in one of six ways:

For adjustable interest rate mortgages, you can select one of the following payment plans:

● 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 in installments, at times and in an amount of your choosing until the line of credit is exhausted.

● Modified Tenure - combination of line of credit and scheduled 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.

● For fixed interest rate mortgages, you will receive the Single Disbursement Lump Sum payment plan.

Lots of options here and you have the flexibility to make changes as you go. For example you can start out with a Line of Credit and then switch to a monthly payout and then back again.

Will the proceeds affect Social Security or Medicare?

Proceeds will not affect public benefits such as SS or Medicare, but can affect "need based" programs such as Medicaid / Medical.

Will I pay Taxes on these proceeds?

Funds received from your loan are generally considered to be *nontaxable as the money received is not income earned. You should always consult your trusted tax advisor.

The way you make payments is flexible, you have the option of paying some of it or all of or none of it every month. If you don’t choose to pay from your available savings you can elect to make no monthly payment and the amount of that payment will be added to your mortgage balance. You can continue to make payments from your equity for as long as you live in the home, even if you owe more than it’s worth.tion

When you sell the property

When you no longer occupy your home as your primary residence for a period of 12 months or longer.

If you fail to maintain the property taxes and homeowner’s insurance.

Commentary

When you can no longer fulfill the terms of the mortgage contract then it is called.

Generally, your heirs/estate will have up to six months to refinance your home if they are choosing to keep the house or up to 12 months to sell.

If you die or if I move out or if you sell the ending is the same.

That is, you let the equity you hold in your home payoff the loan. If there is equity leftover after the loan is paid off then you or your heirs get it. If you owe more than your home is worth then you just turn over your keys and the lending bank is paid the difference by HUD.

Commentary

Since a HECM is insured by HUD, you are guaranteed that you and your heirs will never have to pay more than the property is worth in a bona-fide sale at time of maturity on the loan.

It depends on what the spouse's status is.

If the Spouse is a borrowing spouse and so on the loan, then nothing changes.

If not on the loan they are a non-borrowing spouse of which there are two types:

One is an eligible non-borrowing spouse, the spouse must be:

Married to the borrower at the time the borrower applies for and closes the loan.

They must live in the home as their primary residence

They must continue to pay the taxes and insurance in a timely manner.

They must maintain the home in a reasonable manner.

Commentary

f they meet the eligible non-borrowing spouse conditions then the loan is not due and payable at that time, it is deferred for as long as the eligible spouse continues to meet these conditions.

However they do NOT have access to the loan proceeds if there are still funds available on the line of credit when the borrower passes.

An ineligible non-borrowing spouse would be someone who showed up after the reverse mortgage was already in place or a spouse who does not live in the subject property.

Often yes, after the balance of your reverse mortgage is paid off, all remaining equity will go to your heirs.

Once the last surviving borrower dies, sells your home, or no longer resides there as the primary residence, you or your estate is responsible for repayment of the money you received from the reverse mortgage, plus interest and other fees. Any remaining equity belongs to either you or your heirs.

Commentary

A “non-recourse” clause prevents either you or your estate from being responsible for more than the value of your home when the loan is repaid. If the ending loan balance exceeds the home’s value, the estate (heirs) can sign a deed in lieu of foreclosure releasing the property or, pay 95% of the home’s appraised value, less customary closing costs & real estate commissions.

No

Commentary

You do not need to own your home free and clear to get a reverse mortgage. The proceeds can be used for any purpose, but any existing liens on the property must be paid off at closing. If the reverse mortgage is not large enough to cover your existing loan, you can still get the reverse mortgage by bringing in the additional funds from another account and still never have to make another house payment! No

Reverse mortgages have become more popular because they allow the borrower to receive loan proceeds that do not require immediate repayment as long as you remain in your home as your primary residence, do not sell your home, at least one borrower lives in the home, you meet the basic income and credit standards, and follow loan guidelines.

On the other hand, obtaining a home equity loan (or home equity line of credit or second mortgage) requires that you have sufficient income to cover the debt- plus, you must continue to make monthly principal and interest mortgage payments.

Commentary

With a reverse mortgage, you must meet basic income and credit guidelines but you do not make monthly principal and interest payments. Keep in mind you must continue to pay all property related fees, taxes and homeowner’s insurance and maintain the property in good condition.