I am sure you have seen the commercials for reverse mortgages and wondered, what are they? A reverse mortgage is a loan for senior homeowners that allows borrowers to access a portion of their home’s equity and use the home as collateral. Repayment is triggered once the last surviving homeowner permanently moves out of the residence or passes away. Afterward, the estate has six months to repay the reverse mortgage balance or sell the home to pay off the balance.
The minimum age requirement for applicants is 62 years or older.
Applicants must either own their home outright or have a low mortgage balance. Applicants must be able to pay off any mortgage balance when they close on the reverse mortgage. People can use their funds or reverse mortgage funds to pay off their existing mortgage balance.
Applicants cannot owe any federal debt, including federal income taxes or federal student loans. They can use the reverse mortgage loan to pay off such debt.
Applicants must have enough funds to pay ongoing property expenses, including taxes, insurance, maintenance, and repair costs. These funds could be an applicant’s money or agree to set aside reverse mortgage funds to pay such expenses.
The home has to be maintained and insured per the Federal Housing Administration requirements. Failure to do so could result in loan default or foreclosure. The lender will inform the applicants of necessary repairs before closing the reverse mortgage.
All applicants must receive counseling from a HUD-approved reverse mortgage counseling agency to discuss eligibility, the loan’s financial implications, and other alternatives. There is a charge for this service, which the loan proceeds could reduce.
State, local, and nonprofit agencies provide Single-Purpose Reverse Mortgages, the least expensive option regarding interest and fees. Unfortunately, it is the least common and unavailable in every state. Plus, the loan has restrictions for lender-approved items, such as home repairs or property taxes.
Home Equity Conversion Mortgages (HECMs) are federally insured, so they are HUD back. This loan is more expensive than a traditional home loan and has high up-front costs. HECMs are the most popular loan since they carry no income limitations, medical requirements, and no lender-approved requirements. There are three types of payment options:
Term option that provides monthly cash advances for a specific time.
Tenure option that pays monthly advances for as long as the home is the applicant’s primary residence
A credit line allows applicants to draw money from the limit or a combination of this credit line and monthly payments.
Applicants may change payment options for a low fee because of their situation.
Private lenders offer Propriety Reverse Mortgages. Homeowners with higher appraised home values and who want more money tend to apply for these loans since the limits are above current federal lending limits. Qualifying applicants have no or low mortgages on their residing home. Since these loans are not federally insured, they do not have up-front or monthly mortgage insurance premiums (MIPs), but you still need to consider the lender’s interest rates and loan amount.
Other things to consider
If you want a reverse mortgage, shop for the best option. Look at the various interest rates and fees that several proprietary reverse mortgage lenders offer and gather quotes from several HECM providers. HECM limits may influence which one is better.
Please always ensure you are dealing with credible lenders when looking into a reverse mortgage because many predators are willing to take advantage of people, especially those 62 or older. Also, please know the various reverse mortgage scams varying from contractors, flipping, or other misleading scams.
STAGES is here to educate people on financial options for staying at home.