Reverse Mortgages for Senior Homeowners
Epidemic: If you are considering a reverse mortgage, just as a note, while other financial products are being effected by the current Coronavirus epidemic, this program remains unaffected in the marketplace. Call me with any questions: (720) 336-7250
What Is A Reverse Mortgage?
Essentially, a reverse mortgage is a loan. A homeowner that is over the age of 62 and has a certain amount of home equity built up, can borrow against the value of their home and receive the loan in a variety of ways, including one lump sum, fixed monthly payments, or a line of credit.
Reverse mortgages can provide much-needed cash for seniors whose net worth is mostly tied up in the value of their home, and the money can be used for a variety of reasons, such as funding retirement, paying for home improvements, and so on.
There are three types of reverse mortgages. The most common by far is the home equity conversion mortgage (HECM), which is a federally-insured reverse mortgage backed by the U.S. Department of Housing and Urban Development and covers homes with values below $822,000. In addition, there are also single-purpose reverse mortgages, which are offered by some state and local government agencies and some non-profit organizations, in addition to proprietary reverse mortgages, which are private loans that are backed by the companies that develop them. If your home is worth over $822,000, however, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage.
As opposed to a traditional home loan, a reverse mortgage loan recipient does not have to make any monthly payments on the loan. In contrast, the entire balance of the loan is due when the borrower passes away, moves out permanently, or sells the home. The value of a reverse mortgage is federally mandated not to exceed the value of the home itself; in the event that this does occur, neither the borrower nor the borrower’s estate will be responsible for the difference.
How Much Can You Get On A Reverse Mortgage?
Homeowners are unable to borrow 100 percent of what their home is worth; in addition, some of the proceeds of your loan are used to pay for any fees and other expenses. Ultimately, how much you can get for your home depends on the lender and your payment plan. For a HECM, the amount of money you can borrow will be based on the youngest borrower’s age, the loan’s interest rate, and the lesser of your home’s appraised value or the FHA’s maximum claim amount ($822,000 as of Jan. 1, 2021).
That said, the maximum amount of money you can borrow as part of a reverse mortgage is referred to as an “initial principal limit,” which will vary greatly depending on which loan program is chosen.
Can Anyone Get A Reverse Mortgage?
Reverse mortgages don’t have income or credit score requirements, but they still have rules for qualification. All borrowers on the home’s title must be at least 62 years old; the older you are, the more funds you can receive from a HECM. In addition, you must either own your home free and clear or have a substantial amount of equity (at least 50 percent) and you must live in your home as your primary residence for the life of the reverse mortgage. You are also required to meet with a Department of Housing and Urban Development (HUD)-approved reverse mortgage counselor to make sure that you are fully versed in the process and loan terms.
After A Reverse Mortgage Is Done, Who Owns The Home?
A reverse mortgage is a rising debt, falling equity loan, and since you are taking money out of your home without making any payments, the balance goes up and your equity goes down. However, with a reverse mortgage, the borrower – or their heirs – remain the owners of the property, but while they are not expected to make monthly payments on the loan, they are still 100 percent responsible for paying their taxes, insurance, and maintenance on the property.
What Happens When The Last Person On The Reverse Mortgage Leaves The Home?
A reverse mortgage needs to be paid off upon the death of the borrower, or if they permanently move out of the residence. There are multiple options for repaying a reverse mortgage in these instances, including:
- Sell the house and pay off the mortgage balance. This can be done either by the borrower or their heirs, and proceeds from the sale of the home are used to pay off the balance of the loan; any remaining funds can be kept by the borrower or their heirs.
- Sell the house for less than the mortgage balance. HECM borrowers whose homes are worth less than the value of the loan – known as being “underwater” – can satisfy the loan by selling the house for 95 percent of its appraised value, and paying off the HECM with the difference. While this may be less than the amount of the loan, the FHA does now allow lenders to come after the borrower (or their heirs) for the difference, and their credit score is unaffected.
- Provide lender a deed in lieu of foreclosure. If a reverse mortgage borrower passes away and the value of the home is underwater, the borrower’s heirs can provide the lender with a deed as opposed to going through the time and cost of foreclosure. Again, this is an option that will not affect a credit score.
- Have a child take out a new mortgage on the house after the borrower’s death. If an heir wants to keep the home, they can take out a new loan to pay off the HECM. If an heir wishes to keep the home, they should begin applying for loans ASAP upon the borrower’s passing, as the FHA only allows six months for the estate to pay off the HECM.
- Refinance to a forward mortgage. If the borrower wants to move out of the home but keep it as a rental property, they can utilize savings to pay off the reverse mortgage.
Can I Get Out Of A Reverse Mortgage Later If I Decide To For Whatever Reason, Or Am I Stuck Forever Once I Do This?
If you haven taken out a reverse mortgage and decide you no longer want this scenario, there are ways to get out.
First of all, you have the ability to change your mind within three days of signing on the dotted line, via the “right of rescission” period, which is a consumer protection that allows the borrower to change their mind for any reason, without penalty, up to three days after signing the loan agreement.
You can also repay the reverse mortgage. If a borrower has the financial means to do so, they can repay the loan to free themselves of the financial obligation of it; they are only responsible for repaying the balance of the loan, which is the amount borrowed plus interest. There are several ways you can go about doing this:
- Take out a conventional mortgage. If you can afford to live without the additional income provided by the reverse mortgage and have the means, you can take out a conventional mortgage to repay the reverse mortgage.
- Get another reverse mortgage. If you have discovered a better deal on a reverse mortgage elsewhere – say, one with a better interest rate – you may be able to acquire a second reverse mortgage that you can use in-part to pay off the first reverse mortgage.
As you can see, reverse mortgages are versatile and can provide an effective means of utilizing the equity that you have spent decades building up in your home in order to enjoy your retirement. It is recommended that you speak to a qualitied financial expert to determine if a reverse mortgage fits you and your financial situation.
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