A reverse mortgage, otherwise known as a Home Equity Conversion Mortgage (HECM), is a unique program that grants senior homeowners access to the accumulated equity in their property and withdraw a portion as cash. The program is very beneficial for qualifying retired senior citizens.
While standard home mortgages require verification of employment, income, and a variety of other criteria, reverse mortgage qualifications require borrowers are at least 62 years of age and own at minimum 40% of the equity on the home. While the HUD does not enforce a minimum amount of equity, borrowers can only secure a reverse mortgage if the funds from the transaction are sufficient to pay off the original mortgage. Applicants do not need to conform to any income guidelines since the value of the loan depends on the value of the home rather than income. However, new guidelines for 2014 state that the homeowner must have adequate income to maintain property taxes and insurance.
Homeowners (now) need to have enough income to maintain the property before they can acquire a reverse mortgage, but may use a reverse mortgage to supplement income.
Unlike traditional mortgages, reverse mortgages never require that owners make monthly payments and so they never face the threat of default or foreclosure. Reverse mortgages do not put borrowers at risk of losing their homes, which makes them a safer option than Home Equity Loans.
With a traditional mortgage, home condition requirements are nonexistent after the home is purchased, and homeowners are not obligated to keep their homes in good condition while paying off the mortgage. For qualifying seniors of reverse mortgages, however, homeowners must keep the home in good repair since the lender wants to ensure that the house retains its market value.
Lenders handling reverse mortgages will collect the loan balance once the home is sold or the mortgageholder passes away. Reverse mortgage lenders must keep the loan balance plus interest under the value of the home to avoid losing money.
Borrowers with traditional mortgages must make a down payment on a house and assume a mortgage loan to cover the remaining funds. By making monthly payments, the borrower accumulates equity in the home, working toward full ownership. Reverse mortgage borrowers already own the property and instead begin to withdraw money that represents the home’s accumulated equity.
Seniors with traditional mortgages must pay monthly interest fees in addition to mortgage payments. Conversely, reverse mortgages require no payments of interest until the borrower no longer lives in the home, instead accumulating and compounding over the loan term.
Both traditional and reverse mortgages have fees for qualification and approval, including origination, appraisal, and closing costs. Reverse mortgages may also include a servicing fee for seniors who choose to have their reverse mortgage equity paid in monthly installments or made available as open credit.
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