A reverse mortgage allows qualified people to access the equity in their home that they’ve built over the years. It eliminates your current monthly mortgage payment (if there is one) and you receive the remaining cash, tax-free, and can use it for anything.
The borrower(s) must be at least 62 years of age, own their home, and live in it as their primary residence. There are no income requirements*, credit history, or health qualifications to meet. You don’t need to have the entire mortgage paid off to qualify. However, any existing mortgage or lien on the home must be paid off at the closing of the reverse mortgage. In fact, reverse mortgages are often used to pay off existing mortgages.* The borrower is responsible for paying property charges including homeowners insurance, taxes, and maintenance of the home for the term of the loan.
It depends on what you want out of a reverse mortgage. The interest rate type can affect how the funds are disbursed. If you want to pay off your existing mortgage, you'll probably want a fixed-rate, lump-sum reverse mortgage. With this mortgage, all eligible proceeds are withdrawn right away, and interest begins accruing on the entire balance immediately.
An adjustable rate reverse mortgage provides a guaranteed monthly check or line of credit for as long as you live in your home. So, if you don’t need a large lump sum all at once, you should consider a reverse mortgage with an adjustable rate with and a growing credit line of credit.
Interest is charged on any money borrowed and any fees finance. Interest accrues on your outstanding loan balance. A lump sum at the start of the loan means that all of those funds accrue interest over the life of the loan. With a credit line or regular payments, interest accrues each time you make a withdrawal, starting with the first one. Your credit line isn't charged interest until you withdraw from it. When you do, the amount you borrow becomes part of your outstanding loan balance and begins accruing interest.
Under the FHA HECM program, the Federal Reserve Board requires that the lender tells the prospective borrower what their Total Annual Loan Cost (TALC) will be. The TALC displays the total transaction costs over the projected life of the loan. We’ll make sure that you and your family are fully aware of the costs incurred in obtaining a reverse mortgage.
The best way to ‘beat the lender’ on a reverse mortgage is to live a healthy life and to stay in your home for many years while you keep collecting money.
We’d like to dispel some misconceptions about reverse mortgages. Your entire family should understand the risks and benefits.
Does the bank own the home?
NO. The original owner continues to hold the title of the home. This is a tremendous opportunity for seniors who get to continue to live in and own their home while reaping the benefits of the financial flexibility the reverse mortgage provides.
Can you end up owing more than the home is worth?
NO. A reverse mortgage is a “non-recourse” loan. That means that the borrower isn’t personally liable for the debt. The lender’s only recourse is the property. So, neither the borrower nor their estate is liable for any shortfall. Better yet, most family members can purchase the property from the lender for the current loan balance or 95% of the current appraised value—whichever is less.
Is it possible for the homeowners heirs to purchase the house after the homeowners pass?
YES. However, if one of the family members wants to keep the house, they must repay the lender the entire amount of the loan, regardless of its current market value.
What happens after the homeowners have passed away and their heirs want to sell the property, but the amount owed on the reverse mortgage is greater than the value of the property?
The reverse mortgage is federally insured. So the heirs DO NOT have to pay more than its current value. The heirs will have to notify the lender who will then send an appraiser to value the house. After the lender has confirmed the house is worth less than what is owed, the heirs may surrender the deed in lieu of foreclosure. Then they walk away from the house, without owing on the mortgage.
Who has the responsibility for selling the property after the homeowners have passed away?
That responsibility falls to whoever has been appointed to be in charge of the estate.
How long do the heirs of a property with a reverse mortgage have in order to sell the property?
After the last borrower leaves the house, either after moving out or passing away, there is an initial six month period to sell the house. An additional six month extension may be granted, if necessary. The lender must see that the heirs are actively pursuing a sale of the property, and they will typically allow the heirs this time to maximize the equity in the house.
Does having a conservator or power of attorney affect the reverse mortgage program?
The rules are essentially the same. However, the conservator will need probate court approval in order to obtain a reverse mortgage for the conserved parent or parents. Once approved, the conservator will have to attend the federally mandated reverse mortgage counseling session. In the case of a person acting as a power of attorney, both that person and the borrower must attend the counseling session .
It’s important to note that probate courts generally attempt to keep the homeowners in their home. It’s not uncommon for the proceeds of a reverse mortgage to be used for around-the-clock care for the homeowner.
To know whether a reverse mortgage is right for you or your family, the U.S. Dept. of Housing and Urban Development (HUD) and other agencies have prepared materials for homeowners looking for reverse mortgage counseling.
With all FHA-insured Home Equity Conversion Mortgages (HECM), the homeowner is first required to attend an counseling session with a licensed reverse mortgage counselor. In this session, which can take more than an hour and a half, information and advice is given to the homeowner based on his/her budget and individual reasons for wanting a reverse mortgage. The counselor and homeowner(s) review income, any debts or existing mortgages, monthly expenses including medical, home improvement plans, cash flow, and other relevant factors. This session can be held over the phone or in person.
You can also expect to learn about:
For family members acting as power of attorney or legal guardian for the homeowner, the reverse mortgage counselor will require proof of guardianship or power of attorney before arranging the session.
If one spouse is not on title to the property, the spouse must also join the counseling session. This non-borrowing spouse should understand that if the borrowing spouse predeceases or no longer uses the home as their primary residence, the reverse mortgage will become due. In these cases, repayment is typically made through the proceeds of the sale of the property, or through a refinance into a new mortgage.
It is a good idea for the family to sit down together and discuss their wants and needs for a reverse mortgage prior to this session, and for a family member or members to join the counseling session.
After the session, the homeowner will receive the required “Certificate of HECM Counseling”, which verifies that the prospective borrower has met with a licensed counselor.
With this certificate in hand, prospective borrowers are then directed to submit a reverse mortgage application. To find an FHA-approved reverse mortgage counseling agency, visit the HECM National Counseling Network page by U.S. HUD, or search the database by location here.