About Reverse Mortgages
What is a Reverse Mortgage?
A reverse mortgage or HECM (Home Equity Conversion Mortgage) is a low-interest loan for homeowners age 62+ that uses a home’s equity as collateral. The loan amount is a percentage of the home’s value determined by the age of the youngest homeowner. The loan does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate will have 12 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not liable if the home sells for less than the balance of the reverse mortgage.
Am I Eligible?
To be eligible for a HUD reverse mortgage, the Federal Housing Administration (FHA) requires:
- One homeowner/spouse be at least age 62.
- The home can be owned free and clear or should have at least 50% equity. If there is a mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at the closing.
The home must be a single family home or up to 4-unit maximum multiple family home with one unit occupied by the borrower OR a HUD-approved condominium. A “Financial Assessment” – consisting of credit history (not credit score), income and most recent 24 month property tax history is now required for all new applicants to ensure that the reverse mortgage is a sustainable solution
How does it work?
A reverse mortgage accrues interest just like a traditional mortgage except that the homeowner is not required to make monthly payments to reduce the loan balance. As a result the loan balance grows until the homeowner permanently moves out of the property or passes away.
About two-thirds of reverse mortgage holders have adjustable rate reverse mortgages because the rate is usually lower than a fixed rate. Because the homeowners do not make monthly payments, homeowners are not usually as concerned about possible future change in the interest rate.
Over the last few years, the initial interest rate on a reverse mortgage has fluctuated between 3% and 5%. However, the actual interest rate is 1.25% above the quoted rate because the total rate includes the FHA’s ongoing mortgage insurance premium. For example, if the quoted rate is 2.25%, the rate with insurance is 3.50%.
How much is available?
The amount that is available depends on three factors: age, current interest rate, and appraised value of the home. Use the calculator to determine the available amount.
Counseling is Required
A counseling session with a HUD Certified Counselor (either over the phone or in person) is a mandatory step in the reverse mortgage process.
A Pre-Counseling package will be emailed or mailed directly to the borrower prior to the counseling session (It contains fundamental program information as well as the borrower’s reverse mortgage estimate). Counseling is typically $125.00, unless grant funds are available which would provide the counseling free of charge. The fee can be paid at the time of counseling or financed in the loan.
Here is a list of questions that you may be asked by the HUD Counselor to determine if you your general understanding of HECM Home Equity Conversion Mortgage.
When the counseling has been completed, original, signed certificates will be mailed to the homeowner, to be sent back with the completed loan application.
Is it like an Equity Loan?
Generally a home equity loan has strict requirements for income and creditworthiness. Also, with other traditional loans the homeowner must still make monthly payments to repay the loans. A reverse mortgage has no income or credit requirements and instead of making monthly payments, the homeowner receives payments.
With traditional loans the homeowner is still required to make monthly payments, but with a reverse mortgage the loan is not due as long as the homeowner lives in the home. Also, with a reverse mortgage one cannot be foreclosed upon or forced or forced to vacate the home because of a missed mortgage payment. However, the homeowner is still responsible for real estate taxes, insurance, and maintenance.
Purchasing a new home?
Beginning on January 1, 2009, seniors became eligible to use a reverse mortgage to purchase a principal residence as part of HUD’s “HECM for Purchase Program”.
Reverse mortgages are now available to seniors who would like to buy a new home if:
- At least one homeowner/spouse is age 62 or older
- The purchased home will be primary residence
- The purchased home will be occupied within 60 days of closing
- No mortgage loan other than the HECM can be used to buy the purchased home
- The difference between the purchase price of the home and the HECM proceeds must be paid in cash or from the sale of an existing home
The typical completion time from counseling to closing is approximately 30 days. There are essentially 4 steps during this process: