A reverse mortgage is a loan that is available for senior homeowners age 62 and older that allows them to access a portion of their home’s equity. The loan generally does not become due until the last surviving borrower permanently moves out of the property or passes away or the borrower(s) fail(s) to continue to meet the loan obligations1. The funds a borrower obtains from a reverse mortgage loan can be used however the borrower chooses.
The U.S Department of Housing and Urban Development states that reverse mortgage loans “are a special type of home loan that lets a homeowner convert the equity in his/her home into cash. They can give older Americans greater financial security to supplement social security, meet unexpected medical expenses, make home improvements, and more.” Because the Federal Housing Administration (FHA)2 insures the loan, the property must meet specific FHA standards. The borrower must also continue paying required property taxes, homeowner’s and flood insurance, and maintain the home according to FHA requirements. It is also a requirement of the loan to meet with a HUD approved reverse mortgage loan counselor. During this meeting, the counselor will explain the benefits and risks of the loan, the borrower’s expectations and answer any questions the borrower may have.
• The youngest borrower on title must be at least 62 years old
• The home must be owned free and clear or must be paid off with funds from the reverse mortgage loan
• Generally there are no credit score requirements
• Borrower(s) must meet financial eligibility criteria as established by HUD
Obligations of a Reverse Mortgage Loan
• At least one homeowner must live in the home as their primary residence
• Maintain the home in accordance with FHA requirements
• Continue to pay property taxes and homeowner’s insurance
Repaying the Loan
• In the event of death or in the event that the home ceases to be the primary residence for more than 12 months, the homeowner’s estate or heirs can choose to repay the reverse mortgage loan or sell the home
• 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 loan, the heirs will not be responsible for the difference
• No other assets are affected by a reverse mortgage loan. For example, investments, second homes, cars, and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage loan
The amount available for a Reverse Mortgage loan depends on:
• Current interest rates
• The lesser of the home’s appraised value, or sale price up to the maximum lending limit
Distribution of Proceeds from a Reverse Mortgage Loan
• Lump Sum- Receive a lump sum amount at closing (only available for fixed-rate loans)
• Tenure – equal monthly payments as long as the homeowner lives in the home
• Term – equal monthly payments for a fixed number of months
• Line of Credit – draw any amount at any time until the line of credit is exhausted
• Any combination of those listed above
AARP summarizes reverse mortgage loans on their website, “Before entering into a reverse mortgage agreement educate yourself, consult with trusted advisors and understand the pros and cons”. As with any major financial decision, it is highly encouraged that you discuss your current financial situation and goals with a financial advisor. For more information about how much you may receive, use our reverse mortgage calculator at the top of this page.
1 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
2 Federal Housing Administration (FHA) mortgage insurance premiums (MIP) will accrue on your loan balance. You will be charged an initial MIP at closing. The initial MIP will be 2% of the home value not to exceed $13,593. Over the life of the loan, you will be charged an annual MIP that equals .5% of the outstanding mortgage balance.