What Are The Pros And Cons Of A Reverse Mortgage
One major pro is that it gives senior citizens access to the equity in their home with no monthly payments, Cohn said. This money can be used for living expenses or to pay off other debt, like medical bills. And since youll use the equity in your home as collateral, your income and credit score arent contributing factors.
On the other hand, reverse mortgages also have some negatives to consider. The rates and fees are expensive, and they are very hard to get with condos or coops, Cohn said. Also, the payments not made are accumulating and eating into the remaining equity.
What You Need To Qualify For A Reverse Mortgage
A reverse mortgage is a loan taken out against the value of your home. If you are 62 years old or older and have considerable home equity, you can borrow against the value of your home and receive funds as a lump sum, fixed monthly payment, or line of credit. Unlike a forward mortgagethe type used to buy a homeyou wont make any payments to your lender. Instead, the entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home.
A reverse mortgage is one way of accessing the equity youve built up in your home during retirement. Other options include a cash-out refinance or a home equity loan. Each of these financial products has different eligibility and qualification requirements. In this article, well look at what you need to qualify for a reverse mortgage.
There are three types of reverse mortgages. The most common is the home equity conversion mortgage . The HECM represents almost all of the reverse mortgages that lenders offer on home values below $970,800, so thats what this article will discuss. If your home is worth more, however, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage.
How Do Reverse Mortgages Work
When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you a kind of advance payment on your home equity. The money you get usually is tax-free. Generally, you dont have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan.
There are three kinds of reverse mortgages: single purpose reverse mortgages offered by some state and local government agencies, as well as non-profits proprietary reverse mortgages private loans and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages .
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What Happens To Your Surviving Spouse If You Have A Reverse Mortgage Then Pass Away
It depends on whether the surviving spouse was listed as a co-borrower on the reverse mortgage. If so, they can continue to live in the home as long as they continue to meet the loan obligations to maintain the property and pay taxes, insurance, and other expenses.
The surviving spouse will have to move out if they didn’t sign on as a co-borrower unless they qualify under HUD rules as an eligible non-borrowing spouse. They can stay in the home in this case, but they wont receive any further payments from the reverse mortgage. You may want to seek advice from a lawyer or housing counselor if you or your spouse isn’t listed as a co-borrower.
Put Your House Up For Sale
You can sell your home to get out of a reverse mortgage if you have enough equity. Youll need to pay off the loan balance with proceeds from the sale before you can keep any money from it. If the sale does not provide enough money to pay off the loan balance, youll have to use other assets or funds to settle the loan in full.
The first step to selling your home is to determine how much your home is worth. A real estate agent can give you an idea of the market value of your home by comparing it to comparable sales in your area. Although there are many things you can do to help sell your home, choosing a good real estate agent will expedite the entire process.
The next step is to make your home more appealing. You can do this by using staging techniques. A good agent can help you with this and point out any defects in your home. Then, youll need to have a plan that includes pricing your home, listing it, and showing it to potential buyers. Its a good idea to list essential home improvement projects youve made to increase the homes value.
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Reverse Mortgage Borrower Requirements
Reverse mortgages are designed to help older homeowners access their home equity, providing a potentially much-needed source of income when they might be house rich, cash poor.
The most widely used reverse mortgage is the home equity conversion mortgage , insured by the Federal Housing Administration and issued through FHA-approved lenders. If you apply for a HECM, the lender will verify your income, assets, monthly living expenses, credit history, and timely payment of real estate taxes and home insurance premiums. Additionally, you must:
- Be 62 or older .
- Own the property outright or have considerable equity in itgenerally, at least 50%.
- Live in the home as your principal residence.
- Not be delinquent on any federal debt .
- Have the financial resources to maintain the house and pay property taxes, insurance, and any HOA fees.
- Attend a session with a counselor approved by the Department of Housing and Urban Development .
Be sure to shop around and compare the costs of the reverse mortgage loans available to you. While lenders generally charge the same mortgage insurance premiums, other loan costsincluding origination fees, closing costs, servicing fees, and interest ratesvary by lender.
Qualifying For A Reverse Mortgage
To apply for a reverse mortgage, you must be at least 62 years old, live in the home and have paid off all or most of your mortgage.
Most reverse mortgages today are insured by the Federal Housing Administration , as part of its Home Equity Conversion Mortgage program.
If you are eligible, you must first meet with a housing counselor approved by the U.S. Department of Housing and Urban Development . Under Minnesota law, a lender must provide a prospective borrower with a list of at least three independent housing counseling agencies. The lender must also receive certification that the applicant actually received the counseling.
When meeting with the counselor, talk through your concerns and make sure to provide your counselor with an accurate and full picture of your finances. The counselor cant give you the best possible advice without all the relevant information
A good counselor will make sure that you fully understand the reverse mortgage and will help you make a decision.
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Who Pays My Property Insurance And Taxes After I Get A Reverse Mortgage
As the homeowner, you will still be responsible for maintaining your property insurance and taxes. This may be different than a traditional mortgage you have had in the past, for which property insurance and taxes are often included in the monthly payment and are remitted by your servicer. However, based on the results of a financial fitness test, you may be required to have a set-aside account containing proceeds from your reverse mortgage that have been set aside for payment of your property insurance and taxes. If this is the case, you should be notified by your lender and your lender would be responsible for ensuring that timely payments are made toward your property insurance and taxes.
What Is Shared Appreciation And Equity Participation
In exchange for a lower interest rate the lender and the borrower may agree to equity participation. Participation mortgages are so named because the lender participates, or has the right to a share in any increase in the value of your home.
A Shared Appreciation Mortgage takes into account the appreciation in value of the house between the time the loan is signed and the end of the loan term. The lender receives an agreed-to percentage of the appreciated value of the loan when the loan is terminated.
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Alternatives To A Reverse Mortgage
If youre not sold on taking out a reverse mortgage, you have options. In fact, if youre not yet 62 , a home equity loan or HELOC is likely a better option.
Both of these loans allow you to borrow against the equity in your home, although lenders limit the amount to 80 percent to 85 percent of your homes value, and with a home equity loan, youll have to make monthly payments. With a HELOC, payments are required once the draw period on the line of credit expires.
The closing costs and interest rates for home equity loans and HELOCs also tend to be significantly lower than what youll find with a reverse mortgage.
Aside from a home equity loan, you could also consider:
Understanding Reverse Mortgage Loan Qualifications And Requirements
A Home Equity Conversion Mortgage , also known as a government-insured reverse mortgage loan, is a great tool to help you utilize the equity from your home and convert a portion of it into cash. Thousands of senior homeowners have taken advantage of this beneficial tool since its inception in 1961, and you may be able to as well.
Below are some qualifications and requirements as well as other obligations. Eligibility for reverse mortgages depends on : 1) General requirements . 2) Home qualifications . 3) Financial Qualifications .
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Am I Eligible For A Reverse Mortgage
Reverse mortgages are loans that are only available to a specific type of borrower. Heres what makes someone eligible:
You must be at least 62 years old. In order to qualify, the first hurdle youll need to clear is the age requirement. Regardless of your home equity, financial status or other characteristics that might make you a good reverse mortgage borrower, you must be at least 62 years old to be eligible.
Your home needs to be in good shape. If your home is in need of major repairs, you may be denied a reverse mortgage. Lenders typically dont want the funds you receive from your reverse mortgage to be used to make major repairs, and theyll require an appraisal to confirm your homes condition and value.
Your home must be your principal residence. That means you must be living in your home full-time. For example, if youve had recent health problems and are living in a nursing home or assisted living facility, your home is no longer considered your principal residence.
You should have at least 50 percent equity in your home. While it may vary between lenders, the rule of thumb typically states that you should have at least 50 percent equity in your home to qualify. As with any loan, you should shop around to find the best deal.
You have to be current on your insurance and taxes. Lenders will want to be up-to-date on your homeowners insurance and property taxes and theyll want assurance that youll keep paying them even as you give up equity in your home.
Reverse Mortgage Rules And Requirements
The requirements for a reverse mortgage specify a certain eligible age group and property standards outlined by theU.S Department of Housing and Urban Development . Some homeowners must also be prepared to set aside a portion of their reverse mortgage funds for ongoing property costs, depending on the results of the required financial assessment.
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Only Certain Property Types Qualify
For for homeowners to take out a reverse mortgage, they must meet a handful of requirements pertaining to the home.
Homeowners need to own their home outright or have a low enough mortgage balance that it can be paid off with the reverse mortgage. A borrower must maintain the home as his/her primary residence.
Switching gears to home qualifications, the following rules are in place regarding homes and how theyre built:
- A home must be classified as single family
- Vacation homes and secondary homes dont qualify for reverse mortgages
- Manufactured homes and condominiums may qualify for a reverse mortgage
Understanding the above property rules helps senior homeowners better position themselves to successfully apply for a reverse mortgage.
More About Reverse Mortgages
Q: What is a reverse mortgage?
A: A reverse mortgage is a special type of loan that allows you to borrow against the equity that you’ve built up in your home. You must be at least age 62 to qualify. You can put the money toward anything you like, from paying medical bills to making home improvements. Unlike a traditional home equity loan, a reverse mortgage doesn’t need to be paid back immediately, perhaps not even during your lifetime. That means no monthly checks to write to your lender. The HECM reverse mortgage program is run by the Federal Housing Administration .
Q: Can anyone apply for a reverse mortgage?
A: No, you have to be at least 62. You also have to own your home outright or be able to pay off your home with the proceeds from a reverse mortgage. You must live in your home and your home must meet certain criteria according to HUD. Most single-family homes qualify, as do some condominiums, manufactured homes and multiunit structures that meet FHA requirements.
Q: How do I apply for a reverse mortgage?
Next:With a reverse mortgage, do I still own my home? > >
Q:If I take out a reverse mortgage, does the bank own my home?
A:No, the title remains with the borrower. When your home is sold, you or your estate will need to repay the lender any cash you received from the reverse mortgage, plus interest and other fees. Any remaining equity in the home belongs to you or your heirs.
Q: When do I have to pay back a reverse mortgage?
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What Next Steps Should I Take
Many people are leery of reverse mortgages, O’Dell says, because they’ve heard about sky-high origination fees and horror stories of spouses who were evicted after the borrower died. But that was before the implementation of recent FHA rules that protect consumers more broadly, he says.
Some of those rules include capping the amount allowed to be taken out in the first year, limiting loan origination fees to $6,000 and allowing eligible nonborrowing spouses to stay in the house after the borrower dies or moves to a long-term care facility.
There are risks to reverse mortgages, so you should do your research, contact a HUD-approved counselor and choose an FHA-approved HECM lender.
The FHA doesnt insure loans from unapproved lenders, so theres no guarantee youll get the same protections such as letting an eligible nonborrowing spouse stay in the home after your death if you use one.
About the author:Deborah Kearns is a former mortgage writer for NerdWallet.Read more
What Are The Differences Between A 280 280
In New York, there are two types of reverse mortgage loans available to senior borrowers. The first, referred to as a HECM reverse mortgage , is a mortgage loan that is made in accordance with the requirements of the Home Equity Conversion Mortgage program operated by the Federal Housing Administration. HECMs are the only reverse mortgages insured by the Federal Government. The second, referred to as a proprietary reverse mortgage, is a mortgage loan that is made in accordance with the requirements of New Yorks Real Property Law Section 280, or 280-a. Part 79 applies to both proprietary and HECM reverse mortgage loans.
The most important distinction between a HECM and proprietary reverse mortgage concerns the maximum loan amount available under each type of loan. Under the HECM program, the maximum loan amount is capped. Proprietary reverse mortgages, on the other hand, do not have a cap. It is for this reason that they are often referred to as jumbo reverse mortgages.
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Reverse Mortgage Borrowing Limits
If you get a proprietary reverse mortgage, there are no set limits on how much you can borrow. All limits and restrictions are set by individual lenders.
However, when using a government-backed reverse mortgage program, homeowners are prohibited from borrowing up to their homes appraised value or the FHA maximum claim amount . Instead, borrowers can only borrow a portion of their propertys value. Part of the propertys value is used to collateralize loan expenses, and lenders also typically insist on a buffer in case property values decline. Borrowing limits also adjust based on the borrowers age and credit and also the loans interest rate.
How Will I Receive My Money
Reverse mortgage proceeds can be distributed in a variety of ways, such as immediate cash advance, line of credit, or monthly cash advance. Not every option will be available to every borrower, so it is important to make sure you understand your options by talking to your lender and an attorney or housing counselor.
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You Don’t Plan To Move Soon
You should plan on remaining in your home for the near future if you’re considering a reverse mortgage. This rule of thumb isn’t unique to reverse mortgages it also usually doesn’t make sense to get a new forward mortgage on a home you’re about to sell. The reason? Loan closing costs.
| Typical Reverse Mortgage Closing Costs |
|---|
| Cost |
| Required if the home doesn’t meet the FHA’s minimum property standards |
It may not make financial sense to pay these sums if you’re going to move before the loan’s financial benefits outweigh the costs. Moving is one of the events that make your reverse mortgage due and payable. After paying seller fees and repaying your HECM, the proceeds from selling your house may not be enough to support your next step, whether it’s downsizing, assisted living, or paying a relative for caregiving.
