What this article is all about:
Why Would You Want a Reverse Mortgage?
Since its inception over fifty years ago, reverse mortgages have been a viable loan option for thousands of seniors across the nation. A reverse mortgage is a federally-insured loan that allows seniors ages 62 years and older to access the equity in their home and convert it into cash. Read “The Basics of Reverse Mortgages and How They Differ from Conventional Mortgages” for more details.
Unlike conventional mortgages, a monthly mortgage payment is not required of a reverse mortgage borrower. Instead, the borrower just needs to continue to pay their property taxes and home insurance, complete basic maintenance of the home, and comply with any other loan terms. In addition, there are several disbursement options for the funds including a Line of Credit option, a monthly option, and a lump sum option.
Below are a few common scenarios in which a reverse mortgage may be a financially prudent decision.
Financial assistance with a reverse mortgage
A common scenario in which someone would be interested in a reverse mortgage is to supplement their income when funds are lacking. Loan proceeds from a reverse mortgage can be used to pay for anything, including significant expenses like large medical bills or high interest credit card debt.
Many borrowers are able to pay off their existing mortgage with a reverse mortgage, which then frees up income to be used elsewhere. Seniors facing medical problems are also able to pay for care without compromising their health.
Financial planning with a reverse mortgage
Some seniors do not have an immediate need for additional funds, but want easy access to their home equity for future expenditures. A reverse mortgage can be used as a strategic financial planning tool in retirement, especially when choosing the Line of Credit disbursement option.
As a reverse mortgage borrower, there are several disbursement options available to you, such as: receiving the funds in a full or partial sum, receiving monthly payments, or access to a Line of Credit. Since a reverse mortgage Line of Credit amount can continue to increase over time as the home’s value appreciates, it could allow you access to a growing amount of credit.
This is different from a Home Equity Line of Credit (HELOC) because a HELOC cannot grow over time. In addition, a reverse mortgage Line of Credit remains open as long as the borrower complies with all loan terms, whereas a HELOC can be reduced or closed without warning to the borrower if the home’s value falls and reduces the available equity, among other scenarios.
For many seniors interested in having their home equity readily available, or reinvesting their equity elsewhere, the reverse mortgage is a popular strategic financial tool.
What Do You Need to Qualify?
1) You must be 62 years or older to qualify. In the past, all borrowers were required to meet this minimum age. Due to 2014 changes in federal reverse mortgage rules, only the primary borrower must meet the age requirement and the spouse may still be named on the loan regardless of age.
2) You must own your home and either have no mortgage lien or a mortgage that is low enough to allow you equity to draw from. If you have an existing mortgage amount left to pay off, it’s possible to still qualify for a reverse mortgage. In this case, your reverse mortgage could be used to pay off your original mortgage lien.
3) You must live in the home as a primary residence. Vacation homes and investment properties do not qualify. If you have to leave the home for an extended amount of time, it can’t exceed twelve consecutive months or the loan may become due and payable in full. This includes situations such as: moving into a nursing care facility, having an extended hospital stay, or leaving for travel that lasts more than 12 consecutive months.
4) You must satisfy the financial assessment requirements. In a mortgagee letter effective March 2015, the Department of Housing and Urban Development (HUD) announced revised financial assessment requirements for reverse mortgage borrowers. This new process will evaluate the following factors:
In order to adequately assess you as a borrower, lenders must require certain additional documentation such as:
5) Your home must be one of the four types of qualifying homes listed below:
What Do You Need to Continue Paying For?
Be aware of the responsibilities associated with the loan to ensure the loan does not default or become due and payable. Read on for important responsibilities you must be aware of once qualifying for a reverse mortgage:
You’re still responsible for property taxes after a reverse mortgage is closed. You may choose to participate in a reverse mortgage “set-aside”, which allows for a portion of your reverse mortgage funds to be reserved to cover the necessary taxes. For some borrowers who don’t meet minimum income requirements, a set-aside could be required.
Since your home is the collateral that will be used to pay back your loan, it must continue to be protected by all necessary insurances. This may include coverage for hazards like fire, flood, earthquake, theft, and vandalism. You also must continue to pay your mortgage insurance, so that your reverse mortgage continues to be insured by the Federal Housing Administration (FHA).
Your home must also be maintained with basic repairs. The property needs to be well-kept and in good condition, relative to when the home was appraised, so that is retains its value.
Dues & fees
The continued payment of fees related to the property, such as Homeowners Association Fees, is also necessary. Again, the purpose of these fees is to maintain the property’s condition and value.
To prevent default on the loan, be sure to maintain all terms of the loan agreement, such as those mentioned above. The above are some of the terms that you must abide by with your reverse mortgage loan, but these may not be the only terms. You must always make sure you are clear on all loan terms and responsibilities.
If you do not attend to the responsibilities, the reverse mortgage loan may default and become due and payable. You will then be required to pay back the loan, and you may have to sell the home to do so.
For qualified seniors who can satisfy the responsibilities of a reverse mortgage, this loan product can prove financially helpful or a great tool in planning a financially solid retirement.
Resource Center & Glossary
Key terms – in plain English
FHA – Federal Housing Administration.
Home Equity – The excess equity available in your home beyond any principal remaining on the mortgage, or other liens attached to the home.
HELOC – Home Equity Line of Credit is a credit product that allows the homeowner to draw against the equity available in their home.
HUD – The Department of Housing and Urban Development.
HOA – Homeowners Association. Common in condominium and townhome developments, but not exclusive to them. Usually collect a monthly due to maintain common areas, property facades, and similar.