Borrower Credit And Income Less Important
Because reverse mortgages don’t entail monthly payments from borrowers, lenders don’t need to assess a borrower’s likelihood of repayment. As a result, your credit history and income are less important considerations for a loan approval. In fact, until recently, many lenders did not consider credit or income at all in underwriting HECM applications. Incredibly, however, by 2011, 10 percent of all HECM borrowers were in default on their loans and in danger of foreclosure. Many borrowers failed to keep up with their property taxes and homeowners insurance a condition of their loans.
More than 8 in 10 American retirees will run out of money at some point.
For HECM loans originated on or after April 27, 2015, lenders must perform a financial assessment of all applicants to determine if the homeowner can reliably pay housing-related expenses, such as property taxes, homeowners insurance premiums and regular maintenance costs.
HECM applicants who fail their financial assessments may still be allowed to borrow. If the lender is willing, it can withhold some of the reverse mortgage proceeds to pay the taxes and insurance premiums when they come due.
It’s easy to find good reverse mortgage lenders. Use this reverse mortgage ranking tool to find a helpful, well-regarded reverse mortgage lender near you.
How A Reverse Mortgage Also Can Be Paid Off Early
The process of paying off a reverse mortgage is not very complicated. But it is advised that you contact a reverse mortgage specialist to avoid potential issues.
Step 1: Choose a date to pay off your reverse mortgage. Request your lender no further draws against the credit line of the equity and a payoff statement that includes the month when the mortgage is to be paid off.
The payoff statement lists all payments made over the course of the mortgage, accumulated interest, and costs associated with borrowing the loan.
Step 2: The statement may also include 34 days of interest, which provides padding if the payment is posted after the first of the month.
Since a reverse mortgage is backed by the Federal Housing Authority, the posting takes place on the first business day of the month, and a weekend could push it to the third day of the month.
Step 3: If you are selling the home, you may claim reimbursement if you had prepaid the insurance for an entire year. So let your insurance agent know the expected payoff day.
Step 4: It is worth letting your title closing agent handle the mortgage paperwork and the lien releases on your behalf. The process requires release for the lender and the FHA for the mortgage insurance premium.
On the other hand, if you handle the payoff on your own, send a cashier check for the money through overnight mail or wire transfer to the lenders bank. Follow up to make sure that the lender has received the funds.
Accounting For Interest Taxes Insurance And Fees
Its important to note: a reverse mortgage is not free money. Reverse refers to your loan balance. While you remain the owner of your home and receive payments, monthly interest is added to the loan balance, increasing your debt throughout the life of the loan unless you decide to make payments.
Even if you don’t make payments, you won’t be able to defer all payments on your house. You will still be required to pay:
- Closing costs
- Home maintenance
These are important obligations to remember, because you could lose your home to foreclosure if you fall behind on property taxes or insurance or let your home deteriorate.
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Common Reverse Mortgage Questions
According to the U.S. Department of Housing and Urban Development , well over one million Americans currently have a reverse mortgage with more joining every day. However, some consumers still have misconceptions about reverse mortgages and how they work. To help you make an informed decision about using a reverse mortgage to support or improve your own financial outlook, we have put together a list of common questions we encounter about the safety and benefits of reverse mortgages.
Cons Of A Reverse Mortgage
These loans arent for everyone. They come with several drawbacks that you might want to consider before you get one:
- Reverse mortgages decrease the amount of equity you have in your home.
- Your loan balance will increase if you dont pay down your interest over time.
- You may outlive your loans benefits if you dont choose to receive monthly payments throughout the life of the loan.
- A reverse mortgage can make it more difficult for your heirs to benefit from the equity in your home after you pass away.
You should also be aware that, as with many loans, there are many reverse mortgage scams. Make sure you verify your loan and beware of contractors who suggest loans to pay for home repairs or programs that target veterans. The Department of Veteran Affairs does not sponsor any reverse mortgage loans.
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Paying Off The Balance
Heirs or the homeowners themselves can pay off the balance due to keep the home after a maturity event. It usually requires some kind of alternative financing, as well as notice to the reverse mortgage lender.
If youre inheriting the home, youll still need to respond to the lender within 30 days of receiving the due and payable letter. You can usually set up a payment plan. Heirs are typically allowed six months to repay the debt.
You Live With Someone
If you have friends, relatives, or roommates living with you who are not on the loan paperwork, they could conceivably land on the street after your death. Those boarders may also be forced to vacate the home if you move out for more than a year because reverse mortgages require borrowers to live in the home, which is considered their primary residence.
If a borrower dies, sells their home, or moves out, the loan immediately becomes due. One solution is to list your boarders on the loan paperwork however, no one living with you under the age of 62 may be a borrower on the reverse mortgage.
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What An Equity Release Agreement Costs
It’s not a loan, so you don’t pay interest. Instead, you pay fees such as:
- an application fee
- periodic service fees, potentially deducted in advance from your home’s equity
- a fee to end the agreement
Get the fund to go through projections with you, showing the impact on your home equity over time. Get a copy of this to take away, and discuss it with your adviser. Ask questions if there’s anything you’re not sure about.
Learn The Situations Where This Strategy Does And Doesn’t Make Sense
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A reverse mortgage is a type of mortgage loan that’s secured against a residential property that can give retirees added income by giving them access to the unencumbered value of their properties.
Homeowners who are short on cash and find their home equity is their biggest asset might consider a reverse mortgage when they dont have any other viable way to raise money for daily living expenses. In this case, they may want to take out a reverse mortgage.
However, this action is not a decision to make lightly because it’s probably taken years of hard work to accumulate your home equity taking out a reverse mortgage means spending a significant part of that equity on loan fees and interest.
Some of the disadvantages to this approach include hefty fees and high-interest rates that can cannibalize a substantial portion of a homeowners equity.
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Can You Get Out Of A Reverse Mortgage
If you want to get out of a reverse mortgage, there are a few ways you may do so. When it comes to deciding which option is best for you, consider your goals and your financial situation. Some options may come with costs and others may require a lifestyle change like moving out of the home. When considering your options, it may be best to speak to a financial advisor or a reverse mortgage counselor who is approved by the Department of Housing and Urban Development .
If Your Heirs Need To Sell The Home
Some heirs may lack funds to pay off the loan balance and may need to sell the home in order to repay the reverse mortgage loan. If the balance owed on the loan is more than the home is worth, your heirs wont have to pay the difference. If your heirs sell the home, the lender will take the proceeds from the sale as payment on the loan, and the FHA insurance will cover any remaining loan balance.
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Reverse Mortgage Problems And Responsibilities For Heirs
According to a USA Today article from December 2019, heirs who want to pay off a reverse mortgage and keep the home often face months of red tape and frustration when dealing with the loan servicer. Shoddy loan servicing practices often hinder what should be routine paperwork, debt calculations, and communications with borrowers or heirs.
If I Have A Reverse Mortgage Loan Will My Children Or Heirs Be Able To Keep My Home After I Die
It depends. If you have a Home Equity Conversion Mortgage your heirs will have to repay either the full loan balance or 95% of the homes appraised valuewhichever is less.
Upon the death of the borrower and Eligible Non-Borrowing Spouse, the loan becomes due and payable. Your heirs have 30 days from receiving the due and payable notice from the lender to buy the home, sell the home, or turn the home over to the lender to satisfy the debt. However, it may be possible for the timeline to be extended up to a year so that your heirs can sell the home or obtain financing to purchase the home. Your heirs can consult a HUD-approved housing counseling agency or an attorney for more information.
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Who Is Eligible For A Reverse Mortgage Loan
To be eligible for a reverse mortgage, you must meet the following criteria, at a minimum:
- You must be 62 years or older.
- You must have enough equity in your home usually about 50%, but the required amount varies by lender.
- Depending on the type of reverse mortgage you get, you may need to attend a counseling session from a Department of Housing and Urban Development-approved counselor to learn more about the loan and your options.
- You must go through a financial assessment to ensure youre in the best position to be successful with your loan. This will also depend on the type of loan you receive.
Along with these requirements, your home also needs to qualify for the loan. Here are a few basic requirements:
- The home must be your primary residence.
- The home must be in good condition and meet FHA standards .
- The home cannot be a mobile or, in most cases, a manufactured home.
- If the home is a condo, it must be on the HUD/FHA approved condo list. You may still be eligible for a proprietary reverse mortgage if it is not.
Reverse Mortgages In Canada: The Pros And Cons
Thereâs been a lot of talk about reverse mortgages over the past few years, with supporters and opponents both being very vocal. Reverse mortgages are used by older Canadians to provide a source of retirement funds, and with more than 60% of Canadians concerned theyâll outlive their retirement savings, itâs no surprise reverse mortgages are a talking point .
However, there are pros and cons to getting a reverse mortgage. Hereâs everything you need to know about reverse mortgages in Canada.
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Your Spouse Is 62 Or Older
Any borrower on a reverse mortgage must be at least 62 years old. If youre married and your spouse isnt yet 62, getting a reverse mortgage is not ideal. While new laws protect your non-borrowing spouse from losing the home if you die first, they cant receive any more reverse mortgage proceeds after youre gone.
If your reverse mortgage is set up as either a monthly income stream or a line of credit, your spouse might lose access to a source of income they were depending on. Also, reverse mortgage proceeds are based on the youngest spouses age . The younger that age is, the lower the amount you can initially borrow.
If you and your spouse are each at least 62, getting a reverse mortgage might be a good choice. Use an online calculator that is focused on reverse mortgages and talk to prospective lenders or your reverse mortgage counselor about how the value of proceeds you will get changes as you get older.
If you dont need the money immediately, postponing this loan may be a good way to increase the proceeds . And between now and then, you might find another solution to your financial concerns.
Of Equity Payout Matters
The amount you can borrow also depends on the way you choose to take your reverse mortgage proceeds. HUD discourages homeowners from taking their proceeds in a single lump sum by limiting the amount you can take out in the first year of the loan term. Why? A significant number of borrowers in the past used up all of their home equity at the outset. When they needed money later, they found no remaining equity in their homes and ended up in foreclosure.
As a result, in 2013 HUD changed its rules to prevent borrowers from damaging their financial stability by using up home equity too rapidly. Under current HUD rules, you can take out up to 60 percent of your initial principal limit in the first year of your HECM loan term, regardless of whether you’ve opted for a lump sum, line of credit or monthly payments. You can take out more only if your current mortgage balance already exceeds 60 percent of your initial principal limit. In that case, you can take out enough to pay off your mortgage plus additional cash up to 10 percent of your initial principal limit.
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Reverse Mortgage Closing Costs
The federal government does not administer jumbo or proprietary reverse mortgages, so it does not limit the closing costs associated with these reverse mortgages. You’ll need to carefully compare offers from several lenders and make sure you understand them before committing to a lender.
About 31 percent of Americans in 2013 had zero retirement savings.
On the other hand, the federal government does administer HECMs, so it regulates the closing costs of these loans. The government gives you the option to pay the charges out of pocket or finance them by adding them to your loan balance. Some HECM charges, paid to the government, are not negotiable. But you can negotiate some lender fees with the lender.
How Heirs Should Handle A Reverse Mortgage After Death
I’m constantly hearing from heirs of reverse mortgage holders who are wondering what they should do now that the last borrower on the loan has passed or had to move to assisted living. Many heirs have no idea what their options or obligations are or how long they must do them.
If you have a reverse mortgage or have a family member who has a reverse mortgage, you need to arm yourself with this information. Even if you or your relative is not ready to move out of their reverse mortgaged property now, this can save you or your family a lot of grief later.
Do These Things Now Before the Borrower Leaves the Home
The loan becomes due and payable when the last original borrower permanently leaves the property. There are a lot of things you can do before the mortgage holder leaves the home to help make the process smoother later.
Check with your estate attorney, but if your heir is already on the title before you pass or it becomes a matter of a trust change and not a probation, you may be able to eliminate a huge delay for them when settling the property. It may still require a probation action, but your attorney will advise you on that. Your heirs cannot sell or take out a new loan unless they hold title to the home.
Reverse mortgage borrowers should also make sure that your heirs know where you keep your reverse mortgage statements. They will need to access them later.
Heirs Should Act Deliberately But Without Delay
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No Plans To Bequeath Your Home
Some people dont choose to leave their home to anyone, except their spouse if they’re married. If you dont have childrenor your kids are financially successful and inheriting your home wont make a meaningful difference in their livesthen you probably have no specific plans for bequeathing the home.
Maybe because you worked hard to pay for your home, you just want to cash in your equity and spend it all before you die. Youre perfectly entitled to do so.
Upon your death , your loan becomes due and payable. Heirs who want to take possession of the house have the opportunity to pay the reverse mortgage balance to the lender and take back the title. However, they cant always do this. They may not have the cash or qualify to get a regular mortgage to buy your home.
If your heirs dont purchase the home, the lender will sell it on the open market to recoup the money it has lent you through the reverse mortgage. Any positive balance between the sale proceeds and what you owed goes to your estate. If theres a negative balance, Federal Housing Administration insurance covers it. So if youre not concerned about leaving your home to anyone, getting a reverse mortgage might be a good way to get cash.
