Homeowners aged 55 and older (62 for FHA reverse mortgage, a.k.a. HECM) may take advantage of the equity in their home by taking out a reverse mortgage loan. A reverse mortgage is a means of accessing the equity in your home while continuing to live in it. It can provide homeowners with cash they may use to pay off the balance of their mortgage (if any), thereby eliminating monthly mortgage payments. In addition, seniors may use the proceeds from a reverse mortgage to finance home improvement projects or pay medical expenses, among other things.
Most commonly, a reverse mortgage loan will not be due as long as you reside in your home and continue to meet all loan requirements. However, homeowners will continue to be responsible for property taxes and homeowner’s insurance, and must adhere to FHA guidelines, for as long as they reside in the home.
Although some lenders offer private reverse mortgage loans (Proprietary) , many reverse mortgage loans are HECMs (Home Equity Conversion Mortgage), and are fully insured by the Federal Housing Administration (FHA). In the case of HECMs, the funds paid out may be restricted for the first year of the loan and will be decreased to allow for tax and insurance payments. The maximum loan amount is calculated using the age of the youngest borrower in conjunction with interest rates and either the sale price, the appraised value of the home, or the maximum lending limit, whichever amount is least.
Who qualifies for a reverse mortgage?
Per FHA and HUD guidelines, most owner-occupied residences, including condominiums, townhomes and single-family homes that meet FHA property standards, are eligible for a reverse mortgage loan. Additionally, the youngest borrower must be at least 62 years old (proprietary reverse mortgage have similar guidelines except the minimum age is 55). All borrowers are subject to specific financial criteria.
How are funds paid out?
In the 12-month period following the loan closing, and after reserving the amount of any taxes or insurance payments due, borrowers may access up to 60% of the principal limit amount or all HCEM outlined mandatory obligations (whichever amount is greater), plus another 10%. Funds may be disbursed in the following manners:
- Term payments – paid monthly over a set number of years
- Tenure – paid monthly for the life of the loan
- Lump sum – fixed rate loan only proceeds paid in full at closing
- Line of credit – drawn by borrower when needed
- Combination – Small lump sum, line of credit, and choice of term or tenure payments.
Repaying the loan
Having a reverse mortgage, or non-recourse loan, ensures that when your home is sold, neither you nor your heirs owe more than the lesser of the property value or the loan balance, regardless of the sale price. In other words, your mortgaged home is the only asset required to repay the loan. When the loan is due, your heirs have the option of selling the home to repay the reverse mortgage loan or repaying the loan and retaining the property. If your home sells for a price greater than the value of the loan, your heirs are entitled to the difference.
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