Last Updated on May 19th, 2022. Original: June 18th, 2018
A reverse mortgage enables seniors, who are age 62 and older, to convert part of the equity in their primary homes into tax-free cash without having to sell the home, give up title, or take on a new monthly mortgage payment.
The reverse mortgage is fittingly named because the payment stream is “reversed.” Instead of making monthly payments to a lender like with a regular mortgage, a lender makes payments to the homeowner. The homeowner still continues to pay the property taxes and insurance. However, Interest is not paid out of your available loan proceeds but instead accrues over the life of the loan until repayment occurs.
The loan does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the homeowner or estate has approximately 6 months to repay the balance of the reverse mortgage by selling or refinancing the home.
To be eligible for a HECM(Home Equity Conversion Mortgage) reverse mortgage, the Federal Housing Administration (FHA) requires that all homeowners be at least age 62 with sufficient equity. If the home is not owned free and clear, then any existing mortgage must be paid off using the proceeds from the reverse mortgage loan at the closing. In addition, you must meet minimum financial eligibility criteria as established by HUD. However, reverse mortgage credit and income requirements are much easier than with a regular, forward mortgage.
There are several ways to receive the proceeds from a reverse mortgage:
Lump sum – a lump sum of cash at closing.
Line of Credit – draw any amount at any time until the line of credit is exhausted
Tenure – equal monthly payments as long as the homeowner lives in the home.
Term – equal monthly payments for a fixed period of time.
Combination of those listed above
There are no restrictions. Many senior homeowners use cash to supplement income, pay for health care expenses, pay off debt or finance home improvement jobs.
Upon death or in the event that the home has not been the person’s primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage, refinance it with a regular mortgage or put the home up for sale.
If the equity in the home is higher than the balance of the loan, the remaining equity belongs to the estate.
If the sale of the home is not enough to pay off the reverse mortgage, then the lender must take a loss and request reimbursement from FHA. The deficit is not the obligation of the estate.
Therefore, no other assets are affected by a reverse mortgage. The lender cannot take any other assets such as investments, second homes, cars, and other valuable possessions from the estate to pay off the reverse mortgage.
With the HECM for Purchase program, seniors can purchase a home with a reverse mortgage. This purchase program makes it possible for seniors age 62 and older to purchase or build a home that better suits their life and does not require a monthly mortgage payment as long as you live there. Just like with a traditional reverse mortgage, you will remain responsible for property taxes and insurance.
By using a HECM for Purchase, you can bypass the need to ever have a traditional mortgage. In order to purchase a home with a reverse mortgage, you will be required to have a sufficient down payment on the home. The exact percentage is determined by age. The older you are the less you have to put down. If you have an adequate down payment, you can buy your dream home without any monthly payments at all and live in the home for as long as you wish, as with a normal reverse mortgage.
Before deciding that a reverse mortgage is the right option for you, we strongly suggest that you fully research the program.
Below are links to a few recognized, non-lending resources for additional information that may be helpful to you.
Counseling Is Required
FHA HECMs do require that you obtain counseling from a HUD-approved agency. Below is a link to HUD’s page for locating a counselor in your area.
“This material is not from HUD or FHA and has not been approved by HUD or a government agency.”