How Does a Reverse Mortgage Work in 2013?
For those who are fast approaching retirement age or who have already retired, funding what should be a carefree, relaxing stage after a lifetime of work can be incredibly worrisome due to the present global economic situation. Some seniors who have been paying off a mortgage for years or decades might find that they simply will not have enough money to take care of themselves in their old age.
However, there are a few solutions to this problem, and some solutions are certainly better than others. Here are some of the things a person can do to help fund his or her retirement:
- Downsize. Once grown children have left the family home to start their own families, seniors sometimes feel obliged to sell the home, move somewhere much smaller and live off the money made from the sale. This might not be a good option for those who are emotionally attached to their homes; it can even be heartbreaking.
- Rent out a room. Some retirees, in order to guarantee themselves some sort of income to help pay the balance of their mortgage and other bills, will take in a lodger. However, this isn’t a good option for those who value their privacy; having a stranger live in the home might feel almost like an invasion.
- Get a home equity loan. Getting access to the equity that’s built up over years or decades of mortgage payments might seem like a good idea, but repayment needs to start immediately, and if the borrower can’t keep up with payments, he or she could very well lose his or her home.
- Do nothing and take a chance. Frighteningly, what some seniors do is keep the status quo and do their best to keep up with the remaining mortgage payments and drastically cut costs in other areas, such as heating the home or food costs. Just as with a home equity loan, if the mortgage payments don’t get made, the homeowner could lose his or her house.
- Get a reverse mortgage. Out of the above options, the reverse mortgage works the best because it is vastly superior. Seniors will get the income they need while being able to stay in their home. How this type of mortgage works and who is eligible is discussed below.
Definition OF THE REVERSE MORTGAGE LOAN
A reverse mortgage is a loan product that is available for homeowners over the age of 62 (eligibility ages may vary, depending on the lending institution). The collateral for the loan is the home’s equity, and the loan usually doesn’t need to be repaid until the homeowners sell the home, the last surviving homeowner leaves the residence, or until the homeowners pass away.
When the last surviving homeowner permanently moves away from the home, or when the homeowners sell the home or pass away, the estate has approximately six months to repay the reverse mortgage balance. This is usually done by selling the home; remaining equity can be left to heirs or inherited by the estate. What must be emphasized is that debt as a result of the home selling for less than the balance of the reverse mortgage is NOT transferred to the estate or heirs.
Eligibility- CAN I QUALIFY FOR THE HECM REVERSE MORTGAGE?
While the eligibility requirements may be different at other financial institutions such as banks and credit unions, most places that offer a reverse mortgage product have the same requirements as those for the Federal Housing Administration’s HECM (Home Equity Conversion Mortgage) reverse mortgage.
To be considered eligible for HECM reverse mortgage, homeowners must be at least 62 years of age. The home must be owned free and clear, or any liens that exist must be satisfied and eliminated with the reverse mortgage proceeds. Existing mortgage balance, if there is any, can be paid off at the time the reverse mortgage loan closes.
As far as credit checks are concerned, for reverse mortgages there are no credit score requirements; this is because the home is collateral and there are limits as to how much a homeowner can borrow with a reverse loan. An applicant cannot be delinquent on a federal debt while applying for a reverse mortgage.
If the applicant however is in a Chapter 13 Bankruptcy while applying for an HECM reverse mortgage, he or she must have proof that payments have been made on time for at least twelve months.
Therefore, to quickly summarize eligibility:
- Applicants must be at least 62 years of age.
- Applicants must own their home either outright or have built up equity in their home by years or decades worth of mortgage payments. The mortgage balance must be low enough to be completely paid by the proceeds of the reverse mortgage at loan closing.
- Applicants must live in the home
- Applicants cannot be delinquent on federal debts.
- HECM reverse mortgage applicants must receive free or low-cost counseling from an HECM counsellor. Once a counseling course has been completed, the applicant will receive a Reverse Mortgage Counseling Certificate. This is to ensure that applicants gain a thorough understanding of reverse mortgage loans and the products they select.
If you mee the above requirements you can proceed to receiving a free no obligation reverse mortgage quote online – we compare top lenders on your behalf so you can save money and time.
In order to fully understand the reverse mortgage and how do they work it is important to consider the reverse mortgage pros and cons.
Benefits of the HECM reverse mortgage:
- pay off existing mortgage debts or loans/credit cards/medical bills
- receive the income/funds depending on how you need it ( credit line – lump sum – monthly income for life )
- never pay taxes on the income/funds
- no restrictions on the money
- never have to make a mortgage payment to the lender
- you and your spouse can retire comfortably in your home without worrying about foreclosures – evictions – paying mortgage
- use it to purchase a retirement home (pay only 50% the rest is the reverse mortgage – but same features so no mortgage will be due)
- currently reverse mortgage interest rates are at all time low’s – this means you can borrow more equity today and pay less in bank fees.
- it is a loan therefore interest is charged against it (rates are at all time lows right now)
- this loan will take away some equity from your heirs (most likely the home will appreciate in this wont be the case)
- if you don’t pay home insurance/maintenance/taxes you run the risk of foreclosure ( this is the case with a loan or not anyways)
If you are hearing only negatives about the program or common misinformation you should review our reverse mortgage myths page – there we show you what the top myths are this is important to knowing how the program can work for you. Over the last 22 years the HECM program has undergone serious changes to make it a very competitive offer for seniors in or near retirement.
HECM Loan Limits
Depending on the financial institution and reverse mortgage product, the amount that can be borrowed with a reverse mortgage can vary. For example, in order to ensure that the lender does not end up suffering a shortfall, a homeowner in some regions of Canada can only borrow up to 50 percent of the equity in his or her home. This ensures that there will be some value left in the home when the loan becomes due.
In general terms however, in the United States, the amount a homeowner can get depends on how old he or she is, the current interest rate, the appraised value of the home, and lending limits determined by the government. Older applicants usually receive more; and due to the high upfront closing costs, some applicants for a reverse mortgage will prefer a HECM Saver product over a HECM Standard product. While the amount borrowed with a HECM Saver will be significantly less, the upfront costs are extremely affordable.
It must be noted here that while the borrower does not need to pay back the loan as long as he or she uses the home as the primary residence and does not sell it, property and real estate taxes still must be paid and payments must be kept current. Failure to keep current on property taxes could result in the homeowner losing his or her home.
Distribution of payments
Borrowers can select one of several ways to receive the loan. They can choose:
- A lump sum payment at closing
- Tenure – meaning equal monthly payments for as long as the borrower lives in his or her home
- Term - meaning monthly payments of an equal amount over a pre-determined, fixed number of years.
- Line of credit – meaning the ability to use any amount at any time until exhaustion of the line of credit
- A combination of the above options.
Use our free reverse mortgage calculator to get an estimate of how much can you receive with a reverse mortgage..
The reverse mortgage loan procedure
While reading about and researching reverse mortgages can be easy enough, actually going out and learning how to apply for one can be quite daunting. Some of the information can be confusing and in some cases even contradictory. Here is how to go about finding a reverse mortgage product and applying for it. We make it extremely easy for seniors to comparison shop top HECM Lenders online and using our free service to get a quote is the easiest way to compare lenders.
- Contact a reverse mortgage specialist at your local financial institution or someone at the U.S. Department of Housing and Urban Development who will explain terms, benefits, and costs of the different reverse mortgage products. The specialist will also prepare you and help you set up your FHA mandatory HECM counselling session. Loan originators are required by law to provide HECM applicants with a list of HUD-approved counsellors, agencies, and national intermediaries. Loan originators are not allowed to direct you to a specific agency or specific counsellor.
- Arrange your counseling session by calling an agency from the list your reverse mortgage specialist provides you. A session with a trained counselor will last about ninety minutes, and it will take place three to ten days after you call to make the appointment.
- Apply for the loan. Once you have your HECM counseling certificate, you may go ahead and apply for a reverse mortgage at your local bank or lending institution. While filling out the paperwork, you will be asked to select a payment plan, and the lender will disclose the total cost of the loan. Costs will most likely include an origination fee, a Mortgage Insurance Premium, appraisal and service fees, interest and closing costs.
- Wait 1-5 days for the loan to process. Once all the pertinent information is received from the applicant, the paperwork then goes from the lender to a loan underwriter for approval.
- Close the loan. Once the loan has been approved by the underwriter, a “closing” or signing of the reverse mortgage loan is scheduled; depending on the state a title agent or attorney will be present at the closing. At closing, any existing liens are identified and paid off accordingly, and the lender confirms the payment plan. Any lump sum cash requested by the borrower is also paid at this time.
After closing, the loan does not need to be repaid until the homeowner passes away, moves, or sells the home. Borrowers, during the life of the loan, may choose to change the payment plan and have the right to do so; a new Payment Plan Agreement form must be filled out, and a small fee may be charged. The payment plans, once executed, usually go into effect the next month.
References & Resources for you to learn more about the program: