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- A reverse mortgage allows seniors to leverage the equity in their home for cash.
- Owners must be 62 or older and meet strict financial requirements.
- The home itself must also meet requirements related to the condition and type of property.
Besides providing shelter, buying a home is an investment – one of the most important you will ever make. As with any investment, you expect it to increase in value. When it comes time to tap into that value, you have several options, including selling the home, refinancing, or getting a home equity loan.
Another option is a reverse mortgage, a type of loan with unique requirements that allows homeowners to avoid making monthly repayments.
Your estimated monthly payment
- pay one 25% a higher down payment would save you $8,916.08 on interest charges
- Lower the interest rate by 1% would save you $51,562.03
- Pay an extra fee $500 each month would reduce the term of the loan by 146 month
What is a Reverse Mortgage?
A reverse mortgage, unlike a regular mortgage, requires the lender to pay you from the equity in your home, instead of you paying them. Eventually, the lender is repaid with interest when you move, sell your home, or die. Any balance after repayment of the loan goes to you or your beneficiaries.
Reverse mortgages are non-recourse consumer credit obligations, meaning your liability is limited to the proceeds from the sale of your home, According to the Consumer Financial Protection Bureau.
Reverse mortgages come with strict requirements, including a minimum age limit, that protect you and your lender. This means that a reverse mortgage is not for everyone.
“Since only people aged 62 and over are eligible for a reverse mortgage, they should remember that this can be a great option to supplement retirement funds if most of their net worth is tied to their home and plan to age in place,” says Jeff Zhou, co-founder and CEO of Fig Loans.
There are three types of reverse mortgages:
- Home Equity Conversion Mortgages: HECMs are the most common and are backed by the Federal Housing Administration (FHA).
- Exclusive reverse mortgages: Also known as giant reverse mortgages, these are private loans that are not guaranteed by the government. They can be used to mine more equity than with a HECM.
- Single Purpose Reverse Mortgages: As the name suggests, these can only be used for a stated purpose approved by the lender. They are supported by local or state governments or non-profit organizations.
The maximum amount you can borrow on a reverse mortgage is $970,800 in 2022, but that ultimately depends on the appraised value of your qualifying home.
Properties that are not eligible for a HECM include vacation homes, second homes, co-ops, and income-generating properties such as farms.
Reverse Mortgage Requirements
Since HECMs make up the vast majority of all reverse mortgages, the requirements for these federally insured loans are outlined below. Requirements for other types of reverse mortgages are similar to HECMs, but have a few distinct differences.
“In addition to federal rules governing reverse mortgages, 24 states and the District of Columbia have their own rules in the form of state-specific laws,” says Levon Galstyan, CPA at Oak View Legal Group.
Arizona’s Reverse Mortgage Act, for example, has rules for financial advice, disclosures, provisions, repayment terms, borrower’s obligation, prohibited practices, methods of enforcement and the priority of privileges, says Galstyan.
Here are the main federal requirements for getting a reverse mortgage.
1. Age requirements
Reverse mortgages are designed to allow older homeowners to take advantage of the equity they have built up over years of mortgage payments. For government-insured HECMs and state or local-sponsored one-time loans, the minimum age is 62.
Most giant reverse mortgage lenders also require applicants to be 62, but a few offer loans to homeowners as young as 55.
To be a co-borrower on a HECM, your spouse must also be at least 62 years old. If he is not, he will not be able to sign the loan documents and will be classified as an eligible non-borrowing spouse or an ineligible non-borrowing spouse.
If your spouse is under age 62, you should discuss their status with your HUD-approved reverse mortgage counselor.
2. Financial needs
Federal reverse mortgage requirements state that you must demonstrate your ability to pay property taxes, home insurance, homeowners association fees, and any required home maintenance. Failure to continually meet these financial requirements could result in loan default.
Your lender will do an assessment to determine if they feel you will be able to meet the financial requirements. If the lender is in doubt, they can place part of the loan proceeds in a separate account to pay future taxes and other charges.
In addition to meeting loan requirements, you cannot be delinquent on any federal debt. This includes student loans, HUD-insured loans, Small Business Administration loans, and legal liens against property for debt owed to the federal government.
Your reverse mortgage cannot exceed the value of your home, which your lender is responsible for securing. Fees and charges for which you will be responsible may include:
- Mortgage default insurance premiums (2% of original mortgage and 0.5% annually)
- Real estate closing costs, including appraisals and inspections
- Setup fee (capped at $6,000)
- Interest charges
- Service fees paid to your lender
In most cases, the fees can be deducted from the loan proceeds. Although convenient, this will reduce the amount you receive.
In order to be considered for a federally insured HECM, you must agree to see a HUD-approved counselor and pay for it. Counseling is a discussion of eligibility requirements, financial implications, loan repayment and alternatives to a HECM.
“Not everyone qualifies for these loans, so you need to know your alternatives,” says Galstyan. “These include downsizing, refinancing your existing loan, getting a second mortgage and renting out part of your current residence.”
Ultimately, you should feel qualified to make an informed decision about whether a reverse mortgage meets your specific needs.
3. Accommodation requirements
To benefit from a HECM, your accommodation must meet several requirements:
- Your name must appear on the title.
- You must own the home or be able to pay off the balance with the reverse mortgage proceeds.
- This must be your primary residence and you cannot live anywhere else for more than 12 consecutive months, including long-term care facilities.
- It must be a single-family home or a multi-family home with a maximum of four dwellings, including one dwelling that you occupy as your principal residence.
- It can be a manufactured home or a condominium as long as it meets FHA requirements.
The lender must submit the property to HUD for appraisal and analysis before a HECM can be approved. In some cases, the repairs listed must be completed before the loan is finalized. In addition, the property must be insured, including flood insurance, if applicable.
The bottom line
A reverse mortgage may be a good option if you meet the age requirements, have 50% or more equity in your home, and plan to age in place.
Consider how you plan to use the funds and whether your spouse will be a co-borrower. If you receive government assistance, consider the impact of a reverse mortgage on this cash flow and your eligibility for the program.
Finally, weigh the pros and cons of a reverse mortgage versus alternatives, including downsizing, refinancing, or a home equity line of credit. Always remember that an informed decision is the best decision.