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Reverse Mortgages

If you’ve been thinking that now is the time to get a reverse mortgage for yourself or if you have questions about the reverse mortgage option for your parents, lets get started.

Reverse mortgages are a type of real estate financing, but they work differently from other home loans.

A reverse mortgage lets you borrow money from the equity in your house, without any monthly payments on a home loan.  You still have to pay for your property taxes and homeowners insurance, but the mortgage is repaid when the house is sold, or the property owner passes away.

Many of the rules and standards associated with most home loans simply don’t apply to reverse mortgages.

Let’s look at the basic requirements of the reverse mortgage.  The first important requirement is that you can only get a Federal Housing Administration (FHA) reverse mortgage if you’re 62 years and older. Nearly all reverse mortgages are insured through the Federal Housing Administration (FHA). The FHA calls reverse mortgages “home equity conversion mortgages” or HECMs.  You largely qualify for a reverse mortgage on the basis of the equity in your home. The amount you can borrow on a reverse mortgage will depend on the borrower’s age, interest rate, whether the rate is fixed or adjustable, and the property’s value. Monthly payments for principal and interest are not required. Borrowers are required to pay property taxes and homeowners insurance.

The loan is repaid when the borrower moves, sells the property, or passes away.

An FHA-backed HECM is a non-recourse loan so the loan is secured by the property’s value and not the borrower assets.

So, what’s the qualification requirements for a reverse mortgage?  The amount that will be available for withdrawal on a HECM loan or reverse mortgage will vary by borrower and depends on:

  1. Age of the youngest borrower or eligible non-borrowing spouse.
  2. Current interest rate; and
  3. Lesser of appraised value or the HECM FHA mortgage limit or the sales price.

If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow. You can a use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

There are financial requirements with a reverse mortgage, but they are not as stringent as a standard mortgage.  Your lender will verify your income, assets, monthly living expenses and credit history.  They will also verify that you have made timely payments on your property.  Also, property taxes, hazard and flood insurance premiums will be verified.

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.

The HECM loan includes several fees and charges, including, mortgage insurance premiums, both an initial and annual premium, third party charges, origination fees, interest, and servicing fees. Your lender will discuss which fees and charges are mandatory.

A reverse mortgage is a form of debt that grows every month. So how do you pay it off?

First, a reverse mortgage only needs to be repaid when one of these things happens:

  • The property is sold.
  • The borrower moves away.
  • The borrower has passed away.

What if the remaining loan balance is more than the value of the property?

An FHA-backed reverse is non-recourse financing. This means that the debt is secured by the value of the home and nothing else. If the value of the property is not sufficient to repay the debt, then the difference is paid by the FHA insurance program.

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If you’re considering a reverse mortgage, your first step will be to speak with a mortgage professional like myself. They can help you understand the reverse mortgage and decide if it is a good option for you.

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