Reverse Mortgages

What is a reverse mortgage?

A reverse mortgage is a low-interest loan for senior homeowners that uses a home's equity as collateral. The loan amount is a percentage of the home's value determined by the age of the youngest homeowner. 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 estate has approximately 12 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not liable if the home sells for less than the balance of the reverse mortgage.

Eligibility for a reverse mortgage (HECM)
To be eligible for a HUD reverse mortgage, the Federal Housing Administration (FHA) requires that all homeowners be at least age 62. You must own your home or have paid off approximately half of your mortgage balance. If you do have a mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at the closing (the moment which you sign the legal documents). There are no income or credit requirements for a reverse mortgage.

Eligible home types
Almost all home types are eligible. However, mobile homes must be built in the last 30 years, you must own the land, it must be on a permanent foundation, and it must meet an FHA inspection.

Difference between a reverse mortgage and a home equity loan
Generally a home equity loan, a second mortgage, or a home equity line of credit have strict requirements for income and creditworthiness. Also, with other traditional loans you must still make monthly payments to repay the loans. A reverse mortgage has no income or credit requirements and instead of making monthly payments, you receive payments.
With a reverse mortgage the amount you can borrow is determined by an FHA formula that considers your age, the current interest rate, and the appraised value of your home. The older you are, the lower the interest rate. The more valuable your home (up to a certain point), the higher the loan amount will be.
As stated previously, with traditional loans you are still required to make monthly payments, but with a reverse mortgage the loan is not due as long as you live in the home. Also, with a reverse mortgage you cannot be forced to forclose or forced to vacate your home because of a missed mortgage payment. However, you are still responsible for real estate taxes, utilities, and maintenance.

Outliving the reverse mortgage
You cannot outlive a reverse mortgage. As long as at least one homeowner lives in the home (keeping taxes and insurance current) you do not need to repay the loan. Furthermore, you will never owe more than your home's value (a reverse mortgage can not become "upside down").

Estate inheritance
In the event of your death or in the event that you no longer use the home as your primary residence, your estate can choose to convert the reverse mortgage into a traditional mortgage to keep the house or else sell the home to pay the balance (the cash borrowed, interest, and fees).
If the equity in your home is worth more than the amount you owe to the lender, the remaining balance belongs to your heirs. No other assets are affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from your estate to pay off the reverse mortgage.
If the sale of your home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA.

Loan limit
The amount that is available depends on three factors: age (older is better), current interest rate, and appraised value of the home.

Distribution of money from a reverse mortgage
There are several ways to receive the proceeds of a reverse mortgage and you can mix and match as needed.
Lump sum - a lump sum of cash at closing.
Tenure - equal monthly payments as long as you live in the home.
Term - equal monthly payments for a fixed number of years.
Line of Credit - take any amount you please at any time until the line of credit is exhausted.

New guidelines will be in place for 2009 allowing Seniors to sell their current properties and downsize to a new location using a Reverse Mortgage. Call me today and I will set-up a meeting with a Loan Officer to get you started.