What is a reverse mortgage?
Reverse mortgage (HECM) loans are a way for senior homeowners to convert their home equity into tax-free cash, without having to sell or move. Insured by the U.S. government, the Department of Housing and Urban Development (HUD) allows Homeowners who are 62 or older to borrow against the equity of their homes.
Here’s how it works:
- Qualifying homeowners can choose to receive tax-free payments from a reverse mortgage lender either on a monthly basis, in a lump sum, or as a line of credit.
- No repayments are required while a borrower lives in the home.
- Social Security and Medicare benefits are not affected.
- Reverse mortgage lenders recover the loan amount, plus interest when the home is sold (when owners choose to leave the home permanently or pass away.)
- When the loan is paid in full, all equity associated with the property will be distributed to your heirs.
- Borrower must keep house Insured, Pay all Real Estate Taxes and HOA fees if appropriate. Also must maintain house in good condition.
Keep in mind:
Reverse mortgage borrowers continue to own their homes. Because there are no monthly loan payments due, the amount owed grows over time. Depending upon the amount of appreciation, the remaining equity in the home may decrease.
Borrowers must continue to pay homeowner’s insurance, property taxes and HOA dues (if any) during the loan period. It is also the borrower’s responsibility to maintain the home. 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.
Do I qualify for a reverse mortgage?
You must be age 62 or older. And you must occupy the home as your primary residence – for the majority of the year. Borrowers must either 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.
Each borrower listed on the title must apply for the reverse mortgage loan. Required HUD counseling is available in person or over the phone and a HUD counseling certificate is issued. All borrowers must sign the Certificate of Counseling.
Does my home qualify for a reverse mortgage?
First of all, your residence must meet HUD standards. The reverse mortgage must also be the only mortgage held against the residence. That means that if there is a current mortgage on the property, it must be paid off with the proceeds of the reverse mortgage.
Examples of qualifying homes:
- Single Family One-Unit Residences
- 2-4 Unit Owner-Occupied Residences
- Manufactured Homes (certain restrictions apply)
- Condominiums (the entire complex must be approved by FHA)
- Planned Unit Developments
How is the loan amount determined?
The amount of the loan is based on:
- The age of the youngest borrower
- The appraised amount of the property
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 an FHA-insured program, loan counseling is required by an approved HUD counselor.
HECM offers 4 draw options:
- Monthly income for a fixed term, or life
- Line of credit
- Lump sum (in a restricted amount)
- Any combination of the above 3