It can be scary: making a major decision concerning your biggest investment, a decision involving a place that means the most to you. Deciding whether or not a reverse mortgage is right for you takes considerable thought and consideration. We hope the following questions and answers help you in this endeavor.
1. What Is A Reverse Mortgage?
A reverse mortgage is a unique loan that allows homeowner(s) 62 years of age and older to draw on the equity in their home, which is paid to the homeowner(s) in a variety of payout options. One aspect of this loan is that it does not require repayment until the homeowner(s) no longer reside in the residence, the last surviving borrower passes away or does not comply with the loan obligations such as paying property taxes and insurance, and maintaining the property to FHA guidelines. Regulated by the U.S. Department of Housing and Urban Development (HUD), Home Equity Conversion Mortgages are insured by the Federal Housing Administration (FHA) and may help older qualified homeowners meet their financial needs easing money worries for greater peace of mind.
Prior to applying for the loan, it is required that you are made aware of the terms and conditions of the loan through sources provided by HUD. Contact the Housing Counseling Clearinghouse at 1-800-569-4287 to obtain the name and telephone number of a HUD-approved counseling agency. You may also contact our office and we will provide you with the list of HUD-approved reverse mortgage counseling agencies.
Varied types of homes can be eligible for a Reverse Mortgage.
2. Is My Home Eligible For A Reverse Mortgage?
Homes eligible for a reverse mortgage include single-family homes, detached homes, townhouses, and two-to-four unit properties that are owner-occupied. Condominiums must be FHA-approved. Some manufactured homes are eligible but must meet FHA guidelines. Contact your loan officer for more details on manufactured home eligibility.
3. What Are The Differences Between A Home Equity Loan And A Reverse Mortgage?
Reverse mortgages have become more popular because they allow the borrower to receive loan proceeds that do not require immediate repayment as long as you remain in your home as your primary residence, do not sell your home, at least one borrower lives in the home, you meet the basic income and credit standards, and follow loan guidelines.
On the other hand, obtaining a home equity loan (or home equity line of credit or second mortgage) requires that you have sufficient income to cover the debt- plus, you must continue to make monthly principal and interest mortgage payments.
With a reverse mortgage, you must meet basic income and credit guidelines but you do not make monthly principal and interest payments. Keep in mind you must continue to pay all property related fees, taxes and homeowner’s insurance and maintain the property in good condition.
4. How Much Cash Can I Expect To Get?
The cash you can potentially receive is based on the age of the youngest borrower, the current expected interest rate, the mortgage option selected, amount of home equity and the appraised value of the home. For instance, an older individual with a higher value home typically will be eligible for more than a younger person with the same home value at the same expected interest rate. How much money you can take in the first year is limited. For more information on distribution, limits go here.
You do not need to pay off your home to qualify.
5. What Happens If I Outlive The Loan? Will I Have To Repay The Lender?
No. As long as one of the borrowers on the loan note (or original non-borrowing spouse) lives in the home, continues to pay the taxes and insurance and maintains the home in good condition, you will not need to repay the loan. Once the last surviving borrower passes away (and any non-borrowing spouse), the home is sold or the obligations of the loan are not met, the loan must be repaid.
6. Must My House Be Paid Off For Me To Qualify For A Reverse Mortgage?*
No. You do not need to pay off your home to qualify. However, the loan proceeds you receive from a reverse mortgage must be used to pay off the existing mortgage or liens (if there is a mortgage balance owing). You will continue to hold title to your home subject to the mortgage securing the reverse mortgage loan.
7. Do I Have To Pay Taxes On The Cash Payments I Receive?
The cash or proceeds you receive from a reverse mortgage typically are not subject to individual income taxation. However, since you hold the title to your home, you are still responsible for property taxes, insurance, utilities, fuel, maintenance, and other home-related expenses. Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole. We suggest you consult with your tax advisor to provide guidance for your particular situation.
8. How Will This Loan Affect My Estate And How Much Will Be Left To My Heirs?
Once the last surviving borrower dies, sells your home, or no longer resides there as the primary residence, you or your estate is responsible for repayment of the money you received from the reverse mortgage, plus interest and other fees. Any remaining equity belongs to either you or your heirs. A “non-recourse” clause prevents either you or your estate from being responsible for more than the value of your home when the loan is repaid. If the ending loan balance exceeds the home’s value, the estate (heirs) can sign a deed in lieu of foreclosure releasing the property or, pay 95% of the home’s appraised value, less customary closing costs & real estate commissions.
9. Should I Use An Estate Planning Service To Find A Reverse Mortgage?
HUD advises against using any service that charges a fee (except required HECM counseling) or any service that requests a lender referral fee, to obtain a reverse mortgage. HUD provides this information free of charge and can direct you to HUD-approved housing agencies that offer approved reverse mortgage counseling or additional services that are free or have a minimal cost.
There is typically a reverse mortgage (HECM) counseling fee of up to $125. If the borrower cannot afford this fee some counseling agencies will waive the fee for qualified applicants. You can find a HUD-approved housing counseling agency near you by calling 1-800-569-4287 toll free.
10. How Do I Receive My Payments?
Reverse mortgage payments can be received in one of five ways:
- Tenure: equal monthly payments
- Term: equal monthly payments for a fixed period of months as decided by the borrower
- Line of Credit: payments made in installments or at various times and in amounts dictated by the borrower(s)
- Modified Tenure: monthly payments with a line of credit
- Modified Term: monthly payments for a fixed period of months with a line of credit
* There are some circumstances that will cause the loan to mature and the balance to become due and payable. The borrower is still responsible for paying property taxes and insurance. Credit is subject to age, minimum income guidelines, credit history, and property qualifications. Program rates, fees, terms, and conditions are not available in all states and subject to change.
Reverse Mortgage Myths
- You lose your home
- It’s only for broke people
- It’s free money
- My equity isn’t safe
- It’s not a safe program
Reverse Mortgage Facts
- You retain title to your home*
- Many retirees use a reverse mortgage
- It’s a specialized loan
- Reverse mortgages that are FHA-insured (Home Equity Conversion Mortgages) are insured by the Federal Housing Administration providing protections for both borrowers and lenders
* There are some circumstances that will cause the loan to mature and the balance to become due and payable. A reverse mortgage loan is secured by a mortgage on your home and failure to comply with loan terms could result in foreclosure. The borrower is still responsible for paying property taxes, homeowner’s insurance, and maintenance. Credit is subject to age, property, income guidelines and credit history. Program rates, fees, terms, and conditions are not available in all states and are subject to change.
REVERSE MORTGAGES FAQS
How Do I Qualify For A Reverse Mortgage?
To become eligible for a reverse mortgage, you must be at least 62 years old and own your home. You must have equity in the house to pay off any outstanding balances, and your home must be occupied as your principal residence. Minimal income and credit standards must also be met.
How Much Money Can I Get?
The amount of money that a lender will loan depends upon how old you are at the time of closing, how much your house is worth, the total amount of liens, and interest rates. The payoff of your existing mortgage and mandatory obligations along with the payment option chosen will affect the amount of money you will receive.
HUD limits borrowers to using 60% of the available money (after closing costs & fees) in the first year. The remaining funds are accessible beginning year two. This maximum disbursement limit set by HUD allows for the GREATER of:
- 60% of the Principal Limit (amount of money available to the borrower in all years of the loan) in the first twelve months of the loan from your closing date OR…
- The sum of Mandatory Obligations* (existing mortgage payoff, tax liens, closing costs, mortgage insurance premium) plus 10% of the Principal Limit. This total cannot exceed the total the Principal Limit at the time of loan closing.
How Do I Receive My Money?
There are several different options to choose from. You can take the money in a lump sum (up to HUD’s first-year maximum withdrawal), set up a line of credit, monthly payment, or a combination of all three. In the first year, the Line of Credit or monthly Tenure Payments or monthly payments cannot exceed 60% of the Principal Limit. After the first year, the available Line of Credit or Tenure/Monthly payments will be increased when applicable.
What Costs Are Associated With A Reverse Mortgage?
The fees and cost of a reverse mortgage are based on a number of items. For example, an origination fee is paid to the broker/lender, a MIP (mortgage insurance premium) is paid to HUD on the Home Equity Conversion Mortgage (HECM), an appraisal fee, a flood certification fee, a doc prep fee, title and settlement fees, and other standard closing costs. Monthly servicing fees could apply.
What Are The FHA Mortgage Insurance Premium Charges?
The upfront Mortgage Insurance Premium (MIP) is calculated at 2.0% of your home’s appraised value or a maximum of $679,650 (the national lending limit cap of $679,650). For example, a home appraised at $275,000 would have a one-time upfront FHA insurance premium of $5,500. The ongoing FHA insurance premiums are .5% (one-half of one-percent) of each month’s calculated outstanding loan balance.
Is It Required That I Receive Counseling Before Getting A Reverse Mortgage?
Yes. Counseling is required with an independent third party HUD-approved counselor to protect borrowers from receiving incorrect information about reverse mortgages. The lender must be in receipt of the counseling certificate before they can close the loan. To locate a reverse mortgage counselor near you, contact your loan originator or your local HUD office.
Do I Get Taxed On The Money I Receive From My Reverse Mortgage?
The equity in your home is typically considered as loan proceeds and not additional income. Typically the funds from a reverse mortgage are considered tax free. (This does not constitute tax advice. Borrowers should seek professional tax advice regarding reverse mortgage proceeds.)
Do I Have To Pay Any Fees To The Reverse Mortgage Lender During The Course Of My Loan?
A reverse mortgage was created so borrowers don’t have to pay most fees during the course of the loan. Typical upfront costs are for the appraisal and HUD-approved reverse mortgage counseling (some agencies waive counseling fees at their discretion). However, there may be a monthly servicing fee associated with reverse mortgages (which will be financed and added to the loan balance). For more information on the service set-aside, please talk to your loan originator.