f you are sixty or over, it's likely that you have or are thinking about retirement. All your income sources can feel strained, and you need to live off your retirement plans. You quickly determine that retirement plans are insufficient to meet your daily life and medical expenses. You have worked hard to build your house for years, and now that's the only thing you can rely on. But, selling a home can be a challenge in your old age. It's not only the sentiments and memories; there's nowhere else to go.
Fortunately, a reverse mortgage is available, which pays you against your home equity with no mortgage payments. This way, you can meet your daily life expense without the need to sell and move out of the house.
However, as lucrative as it sounds, there are various layers of reverse mortgages that you need to understand well before applying for a loan. This article covers everything you need to know about a reverse mortgage.
What Is a Reverse Mortgage?
A mortgage is when the borrower takes a loan from the bank and pays off the mortgage payments to own the home. A reverse mortgage is just the opposite. If you switch roles, the bank will pay you the monthly payments to own your home.
Reverse mortgages are loans for older people to pull out money from home equity without paying a mortgage. This way, they can sustain their living expenses without the need to sell their home.
In lamens terms, you sell your home ownership in installments to the bank. The right of the home is with you until you die.
How Does Reverse Mortgage Work?
A reverse mortgage works opposite the direction of a conventional mortgage. With a traditional mortgage, you take out a loan, pay the lenders monthly, and finally own the house after the loan is paid off.
On the contrary, in a reverse mortgage, you put your owned home as collateral, and the lender pays you the monthly payments. The amount of the loan increases during the time instead of decreasing. This is because the interest and the principal amount are added to the balance each month. As the loan balance increases, home equity decreases.
However, you must pay the loan's tax, cost, and other fees to keep it. The homeownership remains yours if you pay the costs and insurance and maintain the house at the required level. After your death, the bank sells off the property to recover the loan balance and interest. The remaining balance is paid to the legal heirs.
Similarly, the legal heirs can buy the property from the bank by paying off the reverse mortgage balance. Even though you outlive the loan term, the bank cannot force you to move out.
Qualification For Reverse Mortgage
To qualify for a reverse mortgage, you have to meet the following requirements:
You must be 62 years old or older to qualify for the loan. If your spouse is younger than sixty, then s/he can be a non-borrower. Initially, the younger spouse had to move out of the house after the borrower died. But, this caused more financial problems. Thus, the new rule has that despite the borrower's death, the younger spouse can live in the house as long as s/he pays the fees and maintains the place.
Typically, you don't need a good credit score or history to apply for the reverse mortgage as long as you haven't filed for bankruptcy and defaulted on the loan. Likewise, you must not owe any federal or secondary mortgage debt such as HELOC or a home equity loan.
The home should be a primary residence and must not have any secondary lien. Apart from this, the house should meet the eligibility for the reverse mortgage.
The following homes are eligible for the reverse mortgages:
- Primary residence homes
- Single-family dwellings
- Multi-family units up to fourplexes
- FHA approved condominiums
- Manufactured homes built after 1976
The following homes are not eligible for the reverse mortgage:
- Vacation homes
- Mobile homes built before 1976
- Investment Properties
- Houses built on the farm
- Homes that do not meet FHA home standards.
You should have a substantial amount of equity in your home. At least 50% of the home equity is required to qualify for a reverse mortgage loan.
You must have enough money to pay the property tax, insurance, and loan fees. You are not eligible for the loan if you cannot meet the minimum expenses.
You would also need to attend the counseling session approved by the U.S Department of housing and urban development (HUD). It takes at least 90 minutes and covers the pros and cons of the reverse mortgage and reviews if you are fit for the loan. You need a certificate of counseling while applying for the loan.
Cost of Reverse Mortgage
Typically, the interest rates with reverse mortgages are higher than conventional mortgage loans. This is because the homeowners do not have a good income and rely on the mortgage payments for the family expenses. Usually, the interest rates are variable, but fixed options are also available.
A reverse mortgage is insured, and the borrower has to pay the insurance fees known as Mortgage Insurance Premiums (MIP). The insurance protects the lender if the borrower defaults and the home's value is less than the loan taken. In such cases, the borrower does not need to pay an additional amount. The insurance covers it up.
The lenders also charge origination, property appraisal, servicing, and closing costs. The borrower must pay the minimum costs and insurance fees to keep up the mortgage loan.
How Much Can You Borrow?
It's known that you cannot borrow 100% of your home's worth. Thus, how much you can borrow depends on several factors, including your age, house value, and interest rates. Typically,
- The higher your house worth, the more you can borrow
- The lower the mortgage rate, the more you can borrow
- The older the borrower, the higher the loan proceeds
Usually, the homeowners can borrow 20% to 40% of the total home value as a reverse mortgage.
Types Of Reverse Mortgage
Home Equity Conversion Mortgage (HECM)
Home Equity Conversion Mortgage (HECM) is a popular reverse mortgage backed by the U.S Department of Housing and Urban Development (HUD). These loans can be used for any purpose. Apart from this, the mortgage is federally insured and has a comparatively higher upfront cost. Similarly, you can customize a payment plan according to your needs, such as fixed monthly payments or a line of credit.
Proprietary Reverse Mortgage
Proprietary reverse mortgages are mortgages that a government agency does not back up and are offered by private lenders. They provide significant loan advances based on the value of the home. But, the lenders have their own eligibility criteria, rate, fees, and terms.
Single-purpose Reverse Mortgage
Single-purpose reverse mortgages are provided by nonprofit and state or local governments, usually for a particular purpose. These loans can be used for specific purposes, including home repair or improvement. It is the least expensive but least popular due to the limited useability of the loan proceeds.
Is a Reverse Mortgage Right For You?
Not everyone can benefit from a reverse mortgage loan. Thus, it's crucial to determine if the loan fits you and your circumstances.
A reverse mortgage is suitable if:
- You have limited income or retirement plans
- You have considerable equity in your primary residence
- You don't have heirs to inherit the home, or heirs do not want your house.
- You are facing foreclosure on your existing mortgage.
The reverse mortgage is not for you if :
- You have insurance or enough retirement plans to cover your expenses.
- You have heirs to inherit your property.
- You have other family members who live with you.
- The home has sentimental value to your heirs.
- You have serious health issues and frequently need to move out for treatment.
Pros and Cons of Reverse Mortgage
Before applying, it's crucial to weigh the pros and cons of a reverse mortgage. Here are the pros and cons you need to consider:
- You can access your home equity without the need to sell the house.
- The loan proceeds can be used for living, health care expenses, and debt repayment.
- A non-borrowing spouse not listed in the mortgage can remain in the house even after the borrower dies.
- Borrowing while facing foreclosure can use a reverse mortgage to pay off an existing mortgage, potentially stopping the foreclosure.
- You can experience tax savings.
- Borrowers must maintain the house and pay property tax and homeowners insurance.
- May lead to foreclosure.
- High fees and costs.
- Plenty of mortgage scams to watch out for.
- Shrinking home equity.
- Heirs will inherit less.
How To Avoid Reverse Mortgage Scams?
Due to reverse mortgage scams, people doubt their legitimacy. The mortgage itself is not a scam but a legitimate loan to assist older adults. Unfortunately, some scammers prey on the elderly by posing as trustworthy advisors or lenders.
These con artists convince them to get a reverse mortgage as it is lucrative for the elderly, trying their best to meet their ends and, thus, sign up for the deal. Then they run off with the money, leaving the victim either more in debt or, worse, homeless.
Here are some popular reverse mortgage scams you should avoid:
Some contractors may approach you to get a reverse mortgage loan to pay for your home repairs. Don't fall into this trap. Reverse mortgages are an option, not a compulsion. If someone is pressuring you to get one, there is a high chance that it is a scam.
Some mortgage ads falsely promise veterans special deals to attract older veteran Americans. The Department of Veteran Affairs (VA) does not offer reverse mortgage loans. It is a scam you should avoid at any cost.
Reverse Mortgage Checklist
The federal government requires the borrower to attend a counseling session with an independent agency approved by the U.S Department of housing and urban development (HUD). Based on convenience, you can attend the session via phone or in person. The counselor reviews your financial and personal situation to ensure that you are a good fit for the reverse mortgage. If they feel you are not fit, they might also recommend alternatives. At the end of the counseling, you will be given a HECM certificate of counseling which is essential during the application process.
Find Your Ideal Reverse Mortgage Lender
Once you have decided to move forward with the reverse mortgage, you should research several options offering the reverse mortgage. You can search the database of the National Reverse Mortgage Lenders Association (NRMLA) to find the brokers in your area. It's crucial to opt for the top reverse lenders as you cannot afford to fall into the traps of mortgage scams. It's best to work with the providers with a Certified Reverse Mortgage Professional (CRMP).
Here are some top reverse mortgage lenders:
- American Advisors Group (AAG)
- Finance of America Mortgage
- Reverse Mortgage Funding
- Mutual of Omaha Mortgage
- Liberty Reverse Mortgage
Reverse Mortgage Application
After you have found the reverse mortgage broker, it's time to prepare the essential documents and apply for the mortgage. You will require the following documents for the mortgage:
- HECM counseling certificate
- Photo identification (Passport, Driver's license, or State ID)
- Proof of date of birth ( Birth certificate, Driver's license, or Passport)
- Social security number
- Recent real estate tax bill
- Homeowners insurance policy
- Income and savings statement
Property Appraisal and Underwriting
A property appraisal is required to determine the home's market value and to inspect the property's conditions. If repairs are needed, the repairs are made from the loan proceeds. When a loan file is completed, it is submitted to underwriters. The underwriters review the loan and approve it.
Go To Closing
The loan closing is done by the local attorney who represents the lender. You need to sign a few loan documents to close the loan. After closing, you will have three days to cancel the loan if you change your mind. After four days, you will receive the loan proceeds following the chosen payment plan.
A reverse mortgage is the best option for older people with no income sources looking to pull out home equity to fund their daily living expenses. But, a reverse mortgage is not fit for everyone, and there are eligibility criteria that specify who can qualify for the loan. Since there are many scams, it's crucial to research to find the right mortgage lender and gather all the required information before applying. Generally, a reverse mortgage is the last resort for the loan when you have exhausted all your income sources and loan options.