How do Reverse Mortgages Work?
What is a Reverse Mortgage?
A Reverse Mortgage is a loan secured by a primary residence of 1 to 4 units or FHA approved Condominiums/Town homes made available to Senior’s who has attained the age of 62 or greater. Reverse Mortgages may also be referred to as HECM’s or Home Equity Conversion Mortgages (HECM).
This type of mortgage is insured by the Federal Housing Administration (FHA) allowing Senior’s access to their primary residences equity while at the same time removing the obligation of having to make a monthly mortgage payment.
The amount of money a borrower can receive will vary based on the age of the borrower and/or spouse, current interest rates, the home’s value or purchase price and the County loan limits for where the property is located. A Reverse Mortgage is not due and payable generally until six months after the last surviving homeowner moves out of the home (no longer their primary residence) or passes away.
Can My Heirs Inherit My Home?
When the last borrower stops using the property as their primary residence the Reverse Mortgage becomes “due and payable”. Generally, there is a 12 month period of time provided to settle the Reverse Mortgage. The Heirs or the Estate may choose to repay the Reverse Mortgage to retain the home or choose to sell the home to repay the Reverse Mortgage. If the home is sold to repay the Reverse Mortgage, any amounts that exceed the balance owed on the mortgage are distributed to the Heirs or the Estate.
If at the time of sale the value of the property is insufficient to cover the balance owed on the underlying mortgage, no obligation is passed to the Heirs or the Estate. Reverse Mortgage loans are “Non-Recourse” loans meaning you will never owe more than the lesser of the remaining mortgage balance or the value of the home.
How Do I Qualify?
Since a Reverse Mortgage primarily based on the homes equity and the age of the borrowers, qualifying for a Reverse Mortgage is a bit different from the traditional mortgage loan. Since there are no payments due on a Reverse Mortgage, income and credit requirements are virtually non-existent (except is the Financial Review process covered next). The basic requirements for a Reverse Mortgage are that the borrower must have reached the age of 62 or greater and have sufficient equity in the home, as required by the age and value review, to payoff and existing liens against the property as well as any “set aside” requirements identified through the financial review.
What is the Financial Review Process?
Once a Reverse Mortgage has been completed, the borrower still has several responsibilities to consider. The home must be maintained and kept in good condition as it is used as collateral for the Reverse Mortgage. Property Taxes must remain current, Home Owners Insurance must remain in force and any Home Owners Association Dues or Fees paid.
The financial assessment requirements were created to insure that these remaining responsibilities do not present an undue burden on the individual(s) who have elected to take advantage of the Reverse Mortgage loan. During the application process, the applicant’s income and credit payment patterns will be reviewed to determine is a Life of Loan set aside is required to cover the borrowers remaining responsibilities after the Reverse Mortgage has been completed.
If it is determined that a set aside is required after the review process, the borrowers access to their equity available through the Reverse Mortgage home loan would be reduced by the amounts needed to provide the necessary reserves to cover the anticipated expenses. This measure was added to insure that the Reverse Mortgage borrower would no longer have to be concerned with falling into default on their mortgage loan for failing to comply with the loan terms like continuing to maintain home owners insurance or pay for property taxes.
How Can I Access My Equity?
Proceeds obtained through a Reverse Mortgage can be distributed in several different ways. The borrower(s) can determine which option (or combination of options) works best for their own personal needs.
- Line of Credit – Can Draw Funds as Needed (Available amounts during the first 12 months may be limited).
- Lump Sum – Maximum Available Proceeds are Distributed at Close
- Tenure – Monthly Payments to the Borrower(s) for the Life of the Loan
- Term – Monthly Payments to the Borrower(s) for a specified number of years
What Are The Benefits of a Reverse Mortgage?
- Eliminate your Monthly Mortgage Payments
- Proceeds Received are Tax Free
- You Remain the Owner of Your Home
- You Choose the Distribution Options that work for You
- Social Security and Medicare Benefits are Unaffected* (Government benefit programs that do not test financial resources are not affected. Income awards such as Medicaid and Supplemental Social Security income may be affected).
These are just a few of the many possible benefits available when using the power of a Reverse Mortgage. Whether you are looking to reduce your overall monthly expenses to stretch your retirement income, are looking to create a resource for ongoing travel expenses to be with extended family, provide resources for in home care services, provide a means to help your children while you are still able to be with them and enjoy seeing the benefit from your help or just to establish access to funds needed to cover unexpected expenses like home and auto repairs, a Reverse Mortgage may be an option to help you reach your goals.