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Reverse Mortgages

This article provides information on reverse mortgages, including what is required to apply, when the loan must be repaid, and what can trigger a foreclosure.

What is a reverse mortgage?

A reverse mortgage is a loan that allows older homeowners to borrow against the equity in their homes.

Why are these loans special?

Reverse mortgages are special because the payout to the borrower for equity comes in either a lump sum or monthly payments to them.

What is home equity and how is it calculated?

Home equity is the value of the homeowner's interest in their home.  Home equity is calculated by looking at the current market value after any liens on the property are subtracted.

What does "HECM" stand for and what are the requirements for one?

"HECM" stands for "home equity conversion mortgage."  This is the most common type of reverse mortgage.

For a home equity conversion mortgage, the following requirements apply:

  • The homeowner (applicant) must be at least 62 years old,
  • The home must be the homeowner's principal residence,
  • The homeowner must own the home outright or have a low mortgage, and
  • The balance of the mortgage can be paid off at closing with proceeds from the reverse mortgage loan.

 

What are some things to keep in mind before applying for a reverse mortgage?

In considering a reverse mortgage, remember:

  • The homeowner must meet with a HUD-approved counselor to discuss their eligibility, financial responsibilities of the loan, and other loan alternatives.
  • There are no limits as to how much money the homeowner can borrow.
  • If the homeowner still owes a lot of money on a traditional mortgage, they might not qualify for a reverse mortgage.
  • The homeowner must have the money to pay ongoing property charges, including taxes and insurance as well as maintenance and repair costs.

What are the conditions of a reverse mortgage?

There are several conditions the homeowner must follow when obtaining a reverse mortgage:

  • The homeowner must live in the home for the majority of the year.
  • If the homeowner has been living in a nursing home continuously for 12 months, it may be considered a permanent move.  The homeowner may be required to pay back the loan.
  • The homeowner must stay current on property taxes, which still may be required even if there is a deferral on the property.  Note that failure to stay current on property taxes or maintain insurance will result in a default and grounds for foreclosure.
  • The homeowner must maintain insurance.
  • The homeowner must maintain upkeep of the home.

What is a "non-borrower" and a "co-borrower?"

A "non-borrower" is a person who lives in the home but whose name is not on the loan documents.  Typically, the non-borrower must move when the borrower passes away unless HUD guidelines qualify them to stay.

A "co-borrower" is a person whose name is on the loan documents along with the homeowner (applicant).  The co-borrower is equally responsible to repay the loan.  If the homeowner passes away, the co-borrower along children, other relatives, or others can stay in the home.

What triggers pay back of the home equity conversion mortgage (HECM)?

The home equity conversion mortgage (HECM) must be paid off in full when the last surviving borrower or eligible non-borrowing spouse:

  • Dies,
  • No longer maintins the home as their principal residence,
  • Fails to pay taxes,
  • Fails to maintain insurance, or
  • Fails to make needed repairs.

What are the costs of getting a reverse mortgage?

Reverse mortgages involve upfront costs as well as costs over time.  The homeowner must be prepared to pay lenders fees, upfront mortgage insurance, and real estate closing costs.  Mortgage interest rates can be fixed or adjustable.

How are premiums calculated?

Premiums are calculated by adding interest and mortgage insurance to the loan amount each month.

What can trigger foreclosure and what are the main reasons for foreclosures?

A foreclosure can be triggered when there is a failure to comply with the terms of the reverse mortgage.

Foreclosures can occur when the homeowner (applicant):

  • Fails to pay property taxes,
  • Fails to maintain insurance,
  • Does not live in the home the required amount of time, or
  • Passes away.

Are there alternatives to a reverse mortgage?

There are alternatives to a reverse mortgage, including second mortgage loans, home equity lines of credit, and single-purpose reverse mortgage loans (a one-time loan that helps pay for home repairs, improvements, or property taxes).