A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), is a loan that allows qualifying borrowers to convert a portion of the equity in their home into cash. This mortgage does not become due as long the borrowers live in the home as their primary residence and continue to meet the obligations of the mortgage, including paying property taxes, insurance on the home and performing normal maintenance. One major benefit of a reverse mortgage is that it allows senior homeowners to access a portion of the home’s equity to supplement their retirement income.
Is a reverse mortgage right for you? Read more about the facts and qualifications here.
A HECM loan is insured by the Federal Housing Administration (FHA). Loan proceeds can be used to pay medical bills, to finance living expenses, in-home care, your dream vacation or any extra cash can be saved for unexpected expenses. The loan generally does not have to be repaid until the last surviving homeowner on title permanently moves out of the property or passes away. At that time the estate can repay the balance of the HECM or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the HECM loan. Like with all Reverse Mortgage products, certain eligibility requirements must be met. Borrowers must be 62 years of age or older and own the property outright or have paid down a considerable amount. Borrowers must live in the home as their primary residence and cannot be delinquent on federal debt. They must also meet with a HUD approved Reverse Mortgage Counselor prior to applying for a Reverse Mortgage loan. The property must be a single family home, a 2-4 unit owner occupied house, a HUD-approved condominium or manufactured home that meets FHA requirements. With a HECM, the borrower is required to pay an initial Mortgage Insurance Premium (MIP), as well as an annual MIP of 1.25 percent.
The difference between a HECM and a home equity loan is with traditional loans as a home equity loan, the borrower must still make monthly payments to repay the loans. However, with a HECM, instead of making monthly mortgage payments to the lender, the borrower uses the loan proceeds to pay off any existing mortgage and other mandatory obligations.
With a HECM the amount that may be borrowed is determined by a formula that considers the borrower’s age, the current interest rate, and the lesser of the appraised value of the home, sale price or the maximum lending limit. The funds available to you may be restricted for the first 12 months after a loan closing, due to HECM requirements. Generally, the higher the value of the home, the higher the loan amount will be, up to the FHA’s maximum lending limits.
There are several ways to receive the proceeds from a HECM loan:
- Lump sum – a lump sum of cash at closing
- Tenure – equal monthly payments as long as the homeowner lives in the home
- Term – equal monthly payments for a fixed period of months
- Line of credit – draw any amount at any time until the line of credit is exhausted
- Any combination of those listed above.
Borrowers may access a minimum of 60% of the principal limit amount for the first 12 months after loan closing. Borrowers may be eligible to access an additional 10%, subject to additional HECM requirements, of the principal limit amount for the first 12 months after loan closing.
The principal limit is the amount of the funds available to the borrower through a HECM loan.
You may be able to use a HECM for Purchase loan to buy your next home. Some of the eligibility requirements are listed below:
- At least one spouse be 62 years or older
- The purchased home will be occupied within 60 days of closing
- The purchased home must be your primary residence
- The difference between the purchase price of the home and the HECM proceeds will be paid in cash from the sale of an existing home or another source of eligible funds
- Gift funds may be an acceptable form of down payment, however certain restrictions may apply
- Must be proof that the homeowner has “eligible funds” from qualifying sources for the closing.
- Depending on the source of funds, specific documentation may be required
- 1 to 4 family homes and mixed used property as your primary home.
- FHA approved condominiums
- Newly constructed principal residences where a Certificate of Occupancy or equivalent has not been issued by the appropriate local authority. Specific repair guidelines must be reviewed and completed before the loan can close
- A HECM for Purchase has the usual costs associated with the selling and buying of a property as well as the fees associated with a HECM loan.
How do I know if I am eligible for a Reverse Mortgage and how do I qualify?
To Qualify for a Reverse Mortgage, you must:
- Be at least 62 years’ old
- Own a single-family home, qualified condominium, townhouse or 1 to 4 family homes and mixed used property as your primary residence.
- Subject to credit and income qualification.
How much money can I get?
This depends on your age, the value of your home, the amount you currently owe on your mortgage (if applicable), and interest rates at the time of origination. Other factors include the type of Reverse Mortgage product and particular payment option you select. Your Reverse Mortgage Specialist can calculate how much money you are eligible to receive.
What are my options for receiving money?
Depending on the type of loan you select, you may decide how to receive the money generated by a Reverse Mortgage.
Your payment options are:
- An upfront lump sum payment.
- A line of credit.
- Fixed monthly payments for as long as you remain in your home (or you may choose a shorter period of time, for example, 15 years).
- A combination of monthly payments and line of credit.
NOTE: Fixed interest rate products do not have any payment option available other than the lump sum.
A Reverse Mortgage is a financial planning tool that is used by homeowners from all walks of life to enhance their retirement years. While some have needed a Reverse Mortgage more than others, the growing popularity of this product is evidence of its benefit in a wide array of financial circumstances.
How much does a Reverse Mortgage cost? What are the up front and closing fees?
Reverse Mortgages usually have many of the same costs associated with a regular mortgage. Depending on your lender and your particular circumstance, you may or may not be charged an origination fee.
Other potential costs include a mortgage insurance premium for FHA Home Equity Conversion Mortgages (HECM), an appraisal fee, reverse mortgage counseling costs, and certain other standard closing costs. In most cases these fees and costs may be financed as part of the Reverse Mortgage, so that you incur little to no out-of-pocket expense. Although paying for upfront costs with loan funds is more expensive.
Is an appraisal of my home required to get a Reverse Mortgage?
Yes, an appraisal is required. The value of your home is a factor that determines how much money you can get from a Reverse Mortgage. By law and for your added protection, the appraisal is ordered from a certified FHA appraiser. Some lenders require the borrower to pay a deposit for it at the time of application. Evolve Bank & Trust works diligently to limit any upfront costs, including appraisals.
Do I need a lawyer to apply for a Reverse Mortgage?
Legal counsel is not required. However, Evolve Bank & Trust encourages you to seek the advice of a legal, tax, or financial advisor to help you understand the details of a Reverse Mortgage. With a HECM, you must meet with a counselor from an independent government approved housing counseling agency.
Even seniors with an outstanding first mortgage or other debt on their home may qualify for a Reverse Mortgage.
What kinds of rules apply to all FHA-insured HECM Reverse Mortgages?
- The following rules apply to all FHA – insured HECM Reverse Mortgages:
- Requires advance counseling by an independent counselor who can answer any questions you may have about Reverse Mortgages.
- Limits on the interest rate and origination fees.
- Advance disclosure so that you are made fully aware of the costs involved with a Reverse Mortgage.
- An FHA-insured HECM Reverse Mortgage has a “nonrecourse” clause, which prevents you or your estate from owing more than the value of your home when the loan becomes due and the home is sold. However, if you or your heirs want to retain ownership of the home, you must repay the loan in full – even if the loan balance is greater than the value of the home.
Am I required to receive counseling before I get a Reverse Mortgage?
Yes, counseling is a very important consumer protection required by law for the FHA program. You may complete face-to-face counseling from a local HUD-approved counseling agency or by telephone from a national counseling agency. You will be provided with a list of approved agencies to choose from.
Are the funds from a Reverse Mortgage considered taxable income?
Funds from a Reverse Mortgage are not considered income. It is money you have borrowed against your home and therefore is not currently considered taxable income. So you can be secure in your decision, Evolve Bank & Trust advises you to seek the advice of a legal, tax or financial advisor to determine the applicability of taxes as it relates to your Reverse Mortgage.
You own your home and retain title throughout the life of the Reverse Mortgage.
Can funds from a Reverse Mortgage affect my Social Security or government benefits?
A Reverse Mortgage may affect eligibility of some government programs. Specifically, Medicaid or Supplemental Security Income (SSI) may be affected. To be safe, consult a tax advisor or benefits expert to assist in determining the best type of Reverse Mortgage product for you. A line of credit option may be more suitable for borrowers with SSI or Medicaid.
Who has title to my home when I have a Reverse Mortgage?
You keep title to your home when you have a Reverse Mortgage, the same as with a regular home mortgage.
Am I required to pay anything to the lender during the course of the Reverse Mortgage loan?
No, payments to the lender are not required. The flow of payments is reversed – the lender pays you. As the homeowner, you will still be responsible for making payments for your homeowner’s insurance and property taxes and maintaining the condition of your home.
Are there any limits on how I can use the funds from a Reverse Mortgage?
No, you may use the funds for any purpose. Reverse Mortgages are commonly used for a variety of things, such as paying health care expenses, supplementing retirement income, financing home repairs or even visiting friends and family. Some have used a Reverse Mortgage to purchase recreational vehicles, start a small business and travel. Others have used Reverse Mortgages to eliminate expenses b paying off other financial obligations. Please consider your personal financial goals and objectives and how a Reverse Mortgage could fit into them.
A Reverse Mortgage helps you achieve a greater sense of financial security and independence. It’s a way to stay in your home and achieve “Peace of Mind” for life.
How are interest charges on a Reverse Mortgage determined?
With a Reverse Mortgage, you are charged interest only on the proceeds that you receive. Interest compounds over the life of the loan until repayment occurs. Historically, only variable interest rates have been available, but now fixed rate loans are quickly becoming a more popular option. Your Reverse Mortgage Specialist will provide you with the interest rate that is currently available and explain the differences between the fixed rate and variable rate options.
How much will be owed when my Reverse Mortgage comes due?
At the time the Reverse Mortgage is repaid, the balance owed will be the sum of funds advanced, accrued interest, plus any fees. An FHA-insured Reverse Mortgage has a “nonrecourse” clause, which prevents you or your estate from owing more than the value of your home when the loan becomes due and the home is sold. However, if you or your heirs want to retain ownership of the home, you must repay the loan in full – even if the loan balance is greater than the value of the home.
What happens if I move out of my house after I get a Reverse Mortgage?
Reverse Mortgages can only be made on owner-occupied dwellings. You may live away from your home for up to 12 consecutive months before the loan must be repaid. Reverse Mortgages become due and must be repaid when the borrower dies, permanently moves out or sells the home.
Since 1990 over 750,000 seniors have benefited from the Reverse Mortgage program.
What happens when my house gets passed to my heirs?
When the ownership of your home passes to your heirs, the Reverse Mortgage will become due and payable. Your heirs may either pay the balance due on the Reverse Mortgage and keep the home or sell the home and use the proceeds to pay off the Reverse Mortgage. If they sell the home, they get to keep any excess sales proceeds.
Are there any prepayment penalties?
No, you may make a full or partial repayment at any time without any penalty.
If I am in foreclosure can I still qualify for a Reverse Mortgage?
Even if your current mortgage is delinquent or if you are in the process of a foreclosure, a Reverse Mortgage may still save your home!