Is a Reverse Mortgage Right for You?

If you are homeowner, at least 62 years of age, living in your home, and have either paid off or paid down your mortgage you may be able to qualify for a Home Equity Conversion Mortgage (HECM) or known as a Reverse Mortgage.

What is Reverse Mortgage and How Does it Work?

A Reverse Mortgage is a Federal Housing Administration (FHA) insured mortgage program that allows seniors to convert the equity in their home to cash.  A reverse mortgage is different from a traditional mortgage.  A traditional mortgage the homeowner would make monthly payments.   In a reverse mortgage the homeowner does not make monthly payments to the lender.  They will paid the loan back when one of three conditions take place.  The homeowner dies, move from their home, or does not honor the loan requirements such as paying homeowner taxes or maintaining the home.

A Reverse Mortgage was designed to provide the borrower (homeowner) with a percentage, generally between 45-80% -depending on age), of the homes value.  It also allows the borrower to retain ownership (title) to the home.   The homeowner or heirs will never owe more than the home is worth.  A reverse mortgage is primarily used for cash flow and the money the homeowner receives can be used for anything.  To find out if you qualify use a Reverse Mortgage Calculator.

According to the U.S. Department of Housing and Urban Development (HUD) the amount a homeowner can borrower is based on:

  • Age of the youngest borrower

  • Current interest rate

  • Lesser of appraised value or the HECM FHA mortgage limit of $625,500 or the sales price; and

  • Initial Mortgage Insurance Premium–your choices are HECM Standard or HECM SAVER

The borrower has different options of getting the money.  There are five basic payment plans and the most popular is a line of credit.

Basic Payment Plans

  • Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.

  • Term - equal monthly payments for a fixed period of months selected.

  • Line of Credit - unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.

  • Modified Tenure - combination of line of credit and scheduled monthly payments for as long as you remain in the home.

  • Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

(From website of U.S Department of Housing and Urban Development)

You can change your payment plan option for a fee of $20.

As  with any loan program, it does not work for everyone and it might not be the best option for the homeowner as well.  The first step is talk to a HECM counselor to discuss program eligibility, financial requirements, fees, and possible alternatives to obtaining a Reverse Mortgage.  The counseling session typically costs $125.

What are the Requirements?

According to the U.S. Department of Housing and Urban Development there are three areas of requirements.  They are borrower, property, and financial.   The following is the criteria for a Reverse Mortgage (HECM).

Borrower Requirements 

You must:

  • Be 62 years of age or older

  • Own the property outright or paid-down a considerable amount

  • Occupy the property as your principal residence

  • Not be delinquent on any federal debt

  • Participate in a consumer information session given by a HUD- approved HECM counselor

Property Requirements

The following eligible property types must meet all FHA property standards and flood requirements:

  • Single family home or 2-4 unit home with one unit occupied by the borrower

  • HUD-approved condominium project

  • Manufactured home that meets FHA requirements

Financial Requirements

  • Income, assets, monthly living expenses, and credit history may be verified.

  • Timely payment of real estate taxes, hazard and flood insurance premiums may be verified.

What are the Fees in a Reverse Mortgage?

  1. Mortgage Insurance Premium
    You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan.

  2. Third Party Charges
    Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.

  3. Origination Fee
    You will pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge a HECM origination fee up to $2,500 if your home is valued at less than $125,000. If your home is valued at more than $125,000 lenders can charge 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.

  4. Servicing Fee
    Lenders or their agents provide servicing throughout the life of the HECM. Servicing includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying real estate taxes and hazard insurance premium. Lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate and $35 if the interest rate adjusts monthly. At loan origination, the lender sets aside the servicing fee and deducts the fee from your available funds. Each month the monthly servicing fee is added to your loan balance.

(From website of U.S Department of Housing and Urban Development)

What are the Reason I Would Need to Pay Back the Loan?

There are guidelines within the loan that stipulate reasons why you would have to pay back the loan.

A Reverse mortgage will have to be paid:

  • Upon the passing of the last remaining homeowner

  • Upon the sale of the home

  • If taxes and insurance are not kept current

  • If the home is not properly maintained

  • If the loan was found to have been secured based on fraudulent terms

  • Abandonment of the home

  • Upon the sale of the home

  • If the homeowner declared bankruptcy

Other Criteria Where You Possibly Might Have to Pay Back the Loan:

  • You rent out a portion of the home for income

  • If there is additional debt taken out against the home

  • If your zoning changes

  • If you add a new owner to the home’s title without qualifying it with your lender

The first step is to set up an appointment with an HECM counselor  to better understand and see if you qualify for a Reverse Mortgage.  Make sure you completely understand what a Reverse Mortgage is and if it is the right program for you.