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Reverse Mortgage Information

A Detailed Overview of Reverse Mortgages

The reverse mortgage program, also known as the Home Equity Conversion Mortgage (HECM), was originally developed by the government as a way to provide financial relief to elderly homeowners during the golden years of their lives.  This article outlines the reverse mortgage information you’ll need to know to decide whether a reverse mortgage is right for you.

Many seniors who purchased homes early in life own the full equity of their homes, and a reverse mortgage taps into this home equity and provides income to the homeowners either as a lump sum payment or on a monthly basis.  This type of loan is designed to provide homeowners a way to apply this equity to other expenses and purchases.  Additionally, reverse mortgages allow homeowners to downsize or relocate into new homes without the same fees and steps that a traditional home sale and purchase would require.  If you have questions about the program, our reverse mortgage FAQ may answer many of them.  Read on for additional information.

Reverse Mortgage Qualification Requirements

Acquiring a reverse mortgage is easier than you may think.

• You must own a home.  You don’t have to own it in full, but the home must be your own.
• You must be 62 years old or older.  The older you are, the lower the associated fees will be.
• You must reside in the home as your primary residence.  You must continue to reside in the home as your primary residence while receiving payments through the reverse mortgage.  If you move into a new home, the amount loaned to you become due in full.
• You do not have to pass any credit requirements to obtain a reverse mortgage.  The ownership status on your home is all that is required.

Reverse Mortgage Financial Aspects

A reverse mortgage loan truly operates in reverse.  If you own a home and you’ve purchased it outright or made mortgage payments on it, you own at least a portion if not all of the home’s equity.  The bank or lender pays money to the homeowner in exchange for the right to own an equivalent amount of this home equity.  The homeowner does not have to repay anything until he or she decides to relocate, and all income generated through the loan is considered tax free.

The money provided through a reverse mortgage can be applied to pay for any type of expense.  It can even be used to pay off other debts, loans, and mortgages.  Most often, seniors who take out reverse mortgage use the funds as a source of income.  Lenders provide the money in one of four ways, depending on the needs and desires of the consumer.

• Monthly payments provided on a specified date each month.
• As a credit line, available to fund purchases as needed.
• As a lump sum for the full amount of the equity.
• Any combination or variation of the above options.

As the bank provides money to the homeowner, the bank gains the right of ownership of the depleted equity.  The bank will never gain ownership of the home, though, even once the equity is used up and the reverse mortgage has ended.  At this time, the full amount of funding that has been provided is treated as a mortgage against the property and must be repaid, either by the homeowner or the homeowner’s heirs.  This is typically accomplished through a sale of the home.  The funds from the sale are paid to the bank.

If the home value continues to appreciate even after the homeowner has taken advantage of a reverse mortgage option, he or she owns the new equity.  This equity can be added to the reverse mortgage or accessed in other ways.

When the homeowner moves from the home or passes away, the loan amount comes due.  The debt, as well as ownership of the home, passes on to the homeowner’s heirs.  The heirs can sell the home to pay off the debt and keep the proceeds, or they can keep the home and pay the proceeds out of pocket.  Federal regulations insure that the amount owed on the home never equals more than what the home is worth.  If the home decreases in value such that the amount owed is more than the expected proceeds from the sale of the home, the heirs are responsible for paying back nothing beyond the sale amount.

For a full explanation of all parts of the reverse mortgage program, see the HUD’s helpful summary.

Reverse Mortgage Costs

The costs paid when taking out a reverse mortgage are similar to those paid when taking out any other kind of mortgage.  Origination fees and some other fees are typically higher.  A list of all fees and expenses you’ll need to pay is included here.

• Origination Fee.  This is paid to the lender and is typically the largest of the fees involved.
• Closing Costs.  Title search, appraisals, taxes, and other similar fees involved in closing the loan are all considered closing costs.
• Mortgage Insurance.  All reverse mortgages are overseen by the government, and all require a minimal degree of mortgage insurance to guarantee the funds.
• Servicing Fees.  Your individual lender will charge you a servicing fee on a monthly basis over the course of your loan.  This is a minor fee that typically amounts to a negligent amount.
• Interest Rate.  You’ll be charged interest on the equity provided to you.  The lower the interest rate, the better.

Reverse Mortgage for Purchase

A reverse mortgage can be used as a streamlined tool to allow a senior homeowner to purchase a new home.  This is most useful for seniors who wish to downsize or relocate closer to family or friends. 

With the lump sum option, the senior can make a down payment on a new home without obtaining another mortgage.  The down payment amount is deducted from the full amount of equity paid out to the senior.  Any remaining equity is kept by the senior as income to live on, and the unpaid portion of the new home is owed as debt to the lending bank just as with a standard reverse mortgage.

Reverse Mortgage Application Process

The steps required to apply for a reverse mortgage are much the same as the steps involved in any other mortgage application.  As mentioned above, you do not have to prove any kind of credit eligibility.  If you meet the qualification requirements, you can apply.  Our reverse mortgage checklist outlines all of the steps involved in the application and loan approval process.

You’ll need to attend the required reverse mortgage counseling.  This is one of the few unique qualification requirements tied to the reverse mortgage option.  Once you have completed this step, begin researching and comparing options provided by reverse mortgage and HECM lenders in your area.  Different lenders will charge different fees for the reverse mortgage.  Pick wisely.

Reverse Mortgage Counseling

Counseling is required due to the unique and specialized nature of the reverse mortgage program.  Because the characteristics of the loan are often unfamiliar to many applicants, the government requires that all individuals who wish to pursue a reverse mortgage attend a session with a qualified and approved counselor.  In this session, you’ll be introduced to the reverse mortgage program, the applicant process, and the advantages and disadvantages of the loan.

The counselor will thoroughly explain how reverse mortgages work and how your reverse mortgage will affect your estate and your financial situation.  Check out our thorough overview of the reverse mortgage counseling process and use this interactive form to locate a qualified counselor.

You must work with a federally recognized and qualified reverse mortgage counselor.  Be cautious of scams and phony counselors who may charge you a fee for services you don’t need.  The HUD offers advice on finding legitimate counselors.

Reverse Mortgage Process

There are just a few steps involved in taking on a reverse mortgage.

• Set financial goals and develop a plan for the future.
• Meet with a reverse mortgage counselor.
• Compare rates and fees provided by multiple lenders and select a lender to work with.
  Progress through the application process.
• If purchasing a home, identify the new home you wish to move into.
• Fill out the necessary closing paperwork once you’ve been approved.
• Receive your money and apply it to your lifestyle in accordance with your financial plan.

A reverse mortgage will allow you to continue living in your home for the remainder of your lifetime and give you the money you need to live well during the best years of your life.  Get started on your reverse mortgage today.

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