According to the U.S. Department of Housing and Urban Development (HUD), 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.
What is a HECM reverse mortgage and how is it different?
A HECM reverse mortgage is a special federally insured loan for qualified borrowers that gives access to a portion of the home's equity and offers unique repayment options. HECM = Home Equity Conversion Mortgage. It's the actual name for an FHA reverse mortgage.
How do I qualify for a federally insured reverse mortgage (HECM)?
To be eligible for a reverse mortgage, the Federal Housing Administration (FHA) requires that at least one homeowner be age 62 or older. You must own your home outright or owe a small mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are also required to receive a short consumer information counseling session to better understand the reverse mortgage facts prior to getting the loan.
Does the credit union or government own or get my home?
No, the credit union or government never owns your home. You remain the sole owner and can stay or sell at any time. When all homeowners have left the home for good, or loan obligations are not met, the loan then becomes due. If all homeowners pass away, the home goes to your heir(s) listed in your will, and your heir(s) can sell or refinance. Should one spouse pass away first, the surviving spouse on the title still owns the home and can sell or stay as long as they choose, as long as they remain compliant with the loan requirements.
Are the closing fees or interest rate any higher with a reverse mortgage?
No. The interest rate and closing fees are the same as a regular forward FHA mortgage. As with all federally insured loans, insurance fees are included in the cost.
Can I lose my home if I get a reverse mortgage?
Yes, however the lender may only foreclose if you do not pay your home insurance, property taxes, and any association dues or make required repairs. In addition, the IRS could take action if there is unpaid tax liens, but that is the same as with a regular forward mortgage, too. Remember, because you are not required to make monthly mortgage payments with a reverse mortgage, there is a much lower risk of default.
Will my children lose their inheritance? Will there be equity left for them?
The home should continue to appreciate in value the longer you live there. When the home is sold, the loan is repaid and all remaining equity goes to you or your heirs. If your heirs choose to keep the home, they must refinance it into their own names. If they choose to sell the home, they may have up to 12 months to complete the sale. Remember, the FHA insures the reverse mortgage, so if the loan consumes all the equiy and the home is no longer worth what is owed, the insurance makes up the difference - not you or your heirs. The term used is non-Recourse Insured.
Will a reverse mortgage affect my Social Security or Medicare benefits?
Reverse mortgage loan proceeds are non-taxable monies. The proceeds do not affect Social Security or Medicare benefits in most cases. To be safest, most borrowers utilize the new reverse mortgage “credit line” feature instead of payments sent to them to avoid any income restrictions. It is advised to seek professional income advice from a CPA or tax accountant for further details.
When is a reverse mortgage NOT the right thing for someone?
As with all mortgages, closing costs can reduce the benefits if you plan to move out within three years. The reverse mortgage is designed to be a long-term solution.
What types of homes are eligible for a reverse mortgage?
Single-family homes and 2-4 unit homes with one unit occupied by the borrower are eligible. Manufactured / Mobile homes that meet FHA requirements are eligible. Townhouses are also eligible. Most condominiums, unfortunately, are not eligible.
Am I required to make monthly payments on a reverse mortgage?
No. Monthly payments are not required; however, you are always allowed to make payments if you wish. Some people like to make interest-only payments so the balance owed stays smaller, and others make full payments, but that is completely up to you. When the last borrower leaves the home, or if the loan requirements are not met, full repayment is then required.
Can I qualify for a reverse mortgage if I already have an existing mortgage?
Yes. The reverse mortgage proceeds must pay off your current mortgage and any other liens against the property. If you are short on equity, you are allowed to bring in additional funds to close the reverse loan by paying down your existing loan balance.
Are there any income or credit score requirements?
Yes. Since monthly payments are not required, proof of your income is used to ensure you can continue to pay your basic living expenses, plus home insurance, property taxes and any association dues. A credit check is used to confirm if you have any federal tax liens or other items that may affect qualification. Credit scores are not a consideration.
Do I need to be in good health in order to qualify for a reverse mortgage?
As long as you are legally able to sign the documents, there are no physical health restrictions. You can also use a Power of Attorney (POA) to sign for you if needed.
How much money can I borrow?
Three (3) factors are considered to calculate how much money you can access:
- The age of the youngest borrower on title, including non-borrowing spouses
- The home’s newly appraised value
- Current interest rates on the date you sign the closing documents
Note: The more valuable your home is, the older you are, and the lower the interest rate is = the more money you are able to borrow.
How can I receive my reverse mortgage money?
There are four options for how to receive your funds, and you can make changes to these once your accouunt is established:
- Line of Credit: You are given access to the cash you qualify for to use for any purpose, and the balance will grow larger as it sits in a line of credit waiting for you to access it when needed. This tends to be the most popular option.
- Tenure: The total amount available is divided up into equal monthly payments and sent to you for as long as at least one borrower occupies the property as his/her principal residence.
- Term: You select the amount that is divided into equal monthly payments and sent to you until the money runs out.
- Modified Term and Credit Line: This combines a line of credit you can access as needed, as well as monthly payments sent to you for as long as possible.
What if I am “short to close”, can I bring in cash to still get the reverse mortgage?
Yes, and this situation is very common. Many borrowers are short to close and choose to bring in cash from other assets so they may still reap all the reverse mortgage benefits. Remember, they are not losing that money; they are simply transferring it into their home's equity.
Is it true I may actually buy a new or different home using a reverse mortgage?
Yes. There is a reverse mortgage for purchase (H4P) option that allows qualified borrowers the ability to purchase a qualifying home by putting approximately 45%-62% of the purchase price as a down payment, then using the reverse mortgage for the balance. This means NO monthly payments in your new home for as long as the loan conditions are met. This is a great way to "Right-Size" into a better situation or the home of your dreams.