A reverse mortgage is a type of home equity loan for homeowners who are 62 years of age or older. With a reverse mortgage, borrowers are not required to make monthly mortgage payments and who want to access a portion of their home equity without having to make payments while living in the house. Reverse mortgages are insured by the Federal Housing Administration (FHA).
Reverse mortgages can be used to convert a free and clear home and access funds calculated based on the equity of their home, or for purchase loans for borrowers who can put the down payment for them home, but don’t want to make monthly mortgage payments. It is also used by homeowners who have existing mortgages who want to pay off their existing loans and eliminate monthly mortgage payments.
A reverse mortgage loan uses a home’s equity as collateral. The amount of money the borrower can receive is determined by the age of the youngest borrower, interest rates and the lesser of the home’s appraised value, sale price and the maximum lending limit. The funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements. In addition, you may need to set aside additional funds from loan proceeds to pay for taxes and insurance based on ability to payback liabilities and credit history.
The loan does not generally have to be repaid until 6 months after the last surviving homeowner moves out of the property or passes away. At that time, the estate typically sells the home to repay the balance of the reverse mortgage and the heirs receive any remaining equity. The estate is not personally liable for any additional mortgage debt if the home sells for less than the payoff amount of the reverse mortgage loan.
To be eligible for a reverse mortgage loan, the FHA requires the youngest borrower on title to be 62 years or older. Borrowers must also meet financial eligibility criteria as established by HUD. If there is an existing mortgage on the home, it must be paid off with the proceeds from the reverse mortgage loan. The home being financed must meet FHA minimum property standards.
When the reverse mortgage loan does become due, the borrower’s heirs/estate can choose to repay the reverse mortgage loan and keep the home or put the home up for sale in order to repay the loan. If the home sells for more than the balance of the reverse mortgage loan, the remaining home equity passes to the heirs.
If the home sells for less than the owed balance, the estate is not required to pay more than the value of the home at the time the loan is repaid.
Distribution of Funds
Reverse mortgage loan proceed can be received in any combination of the following options:
- Line of credit – draw as needed up to the maximum eligible amount available 12 months after the closing date
- Lump sum – a lump sum of cash at closing (only available on fixed-rate loans)
- Tenure – monthly payments for the life of the loan
- Term – monthly payments for a specific number of years
Borrowers may access the greater of 60 percent of the principal limit amount or all mandatory obligations, as defined by the HECM requirements, plus an additional 10% during the first 12 months after loan closing. The combined total of mandatory obligations plus 10% cannot exceed the principal limit amount established at loan closing. The borrower may also need to set aside additional funds from the loan proceeds to pay for taxes and insurance. If you are interested in a Reverse Mortgage, call use today. We work with one of the nation’s top producing Reverse Mortgage lenders and have closed over 100 reverse mortgage loans in the past two years.