Our new offering for HUD HECM - HOME EQUITY CONVERSION MORTGAGES FOR SENIORS
The amount that will be available for withdrawal varies by borrower and depends on:
- Age of the youngest borrower or eligible non-borrowing spouse;
- Current interest rate; and
- Lesser of appraised value or the HECM FHA mortgage limit or the sales price.
PHOTO |
|
|
Thank you for exploring your reverse mortgage options. We’ve created this introductory guides to help get you started on learning more about this versatile retirement financing tool. |
||
Getting Comfortable with a Reverse Mortgage |
|
How Does it Work?updated: March 9, 2022 1:02 pm
The loan doesn’t come due until they move out, sell the house, fail to meet the loan obligations, or die — in which case the heirs assume responsibility for the loan.
Learn more about reverse mortgages and whether they are the right choice for you.
-
-
How does a reverse mortgage work?
-
- A single lump-sum payment
- Tenure: a monthly annuity for a specific number of months or for as long as the house is your primary residence
- A line of credit: You have the option of withdrawing funds as you need them, but the unused principal balance grows over time according to the interest rate. For example, assuming you get a $200,000 line of credit with a 4% interest rate, if you don't use any of that money, the principal loan amount would go up to roughly $300,000 over the next ten years. While this does mean you owe more money than at the start, you also have access to a larger line of credit in the long run. This means that you can potentially receive a larger amount of funds than originally requested over the life of the loan.
GET STARTED
- Access a large amount of cash or a steady source of income in retirement
- Flexibility in how you receive the money. Options include a lump sum upfront, an annuity, a line of credit or a combination of the three
- You or your heirs don't need to make any payments on the loan until you move out, sell the house or pass away
- HECMs are non-recourse loans, so you will only owe what you borrowed even if your house loses value
- You do not pay income tax on money you receive from a reverse mortgage
- You have the right to change your mind for any reason and cancel the reverse mortgage within three business days of closing on the loan
- If one spouse should pass away, the surviving spouse will be able to stay in the house if they are a co-borrower
- If you have an existing mortgage, funds obtained from a reverse mortgage must be used to pay it off
- You must pay mortgage insurance premiums and homeowners insurance for the life of the loan on federally backed loans
- If you should move out of the home for more than 12 consecutive months, and there is no eligible co-borrower living in the house, the loan could become due
- Other expenses associated with reverse mortgages, like fees and closing costs, will reduce the amount of cash you get
- If you and your co-borrowing spouse die before paying back the loan, your heirs must pay off the full loan balance or 95% of the home's appraised value (whichever is less) if they wish to keep the house from foreclosure
- Falling behind on property taxes or insurance payments could trigger default and foreclosure
- The loan proceeds could affect your Medicaid and Supplemental Security Income eligibility, if you take them as a lump sum and these are unspent after thirty days
Keep in mind that, depending on the kind of reverse mortgage you choose, there may be limits placed on how you can use the money.
For single-purpose reverse mortgages, the money’s purpose needs to be reviewed and approved by the lending agency.
In the case of HECM mortgages, the house has to comply with HUD’s minimum property standards to qualify. Furthermore, you may be required to use some of the loan proceeds for home improvements if your home doesn’t meet HUD standards.
In order to qualify for a reverse mortgage loan, you (and your home) must meet the following requirements:
- Be at least 62 years old, own your home and live in it as your primary residence
- The home should have enough equity for the reverse mortgage amount you need
- You must be able to pay taxes and homeowners insurance premiums on the house
- You must keep the house in good condition
- In the case of a HECM, you have to attend financial counseling with a HUD-approved counseling agency
If you receive Medicaid or Supplemental Security Income (SSI) benefits from the Social Security Administration, consult a financial expert to determine if your benefits will be affected by this kind of home equity loan.
Additionally, there are other options available if you don’t meet the age requirements but are interested in a similar type of loan, including home equity loans and home equity lines of credit (HELOCs).
Check out our guide to the best home equity loans to explore those other options.
How do you pay back a reverse mortgage?
A reverse mortgage becomes due once all borrowers have died or moved permanently out of the home, among other circumstances.
When the borrower of a reverse mortgage dies, the bank will discuss loan payment options with the heirs and inform them of the current mortgage balance. The heirs will generally have 30 days to decide what to do with the loan and with the property.
These are some of the options available for you or your heirs to pay a reverse mortgage:
- Sell the home and use the proceeds to pay off the balance on the reverse mortgage loan
- If the heir wishes to keep the property, pay the loan balance or 95% of the home's appraised value, whichever is less
- Take out a loan — either a traditional mortgage loan or another reverse mortgage — on the property after the borrower has died to cover the balance on the mortgage
If the heirs decide to sell the property or pay back the loan, they have 30 days from the date of the borrower’s death to pay off the loan.
The lender might approve a 90-day extension if the heirs can provide documentation that proves they are trying to sell or repay the loan in good faith. In some cases, it may even be possible to extend the timeline for up to a year. This information mainly applies to federally backed loans, though lenders may make exceptions for proprietary loans.
If the heirs do not pay back the loan within the agreed-upon timeframe, the lender may proceed with foreclosure.
When do you pay back a reverse mortgage?
In most instances, you don’t have to pay back the reverse mortgage loan as long as you live in the house. However, the loan will become due and payable in any of the following situations:
- Death. When you die, your heirs become responsible for paying back the mortgage or reaching an arrangement with the financial institution.
- Selling the property. The loan is paid off with the sale proceeds.
- Living outside the home for one straight year. If you live away from the house for more than 12 consecutive months, you might need to start paying the loan. If your spouse is a co-borrower or an eligible non-borrowing spouse, they could stay in the home without paying back the loan.
- Not paying property taxes or homeowners insurance. All reverse mortgages require that the borrower pay taxes and homeowners insurance. Failure to do so will result in foreclosure. If you are unable to pay, seek a reverse mortgage counselor right away.
- Not maintaining the house. The home needs to be kept in livable condition.
Once the loan is due, you or your heirs need to speak with your lender to determine a time period to settle the loan balance. This time period varies depending on the situation, but it could be as little as 30 days in some cases before the lender begins the foreclosure process.
How to avoid reverse mortgage scams
Unfortunately, the promise of reverse mortgages has also been used to scam homeowners.
Because HECMs are federally backed, some unscrupulous lenders have tried to target cash-strapped seniors with the promise that a reverse mortgage is a safe way to access money for retirement. In many cases, the targeted individuals are not told that property taxes, insurance and home repairs must continue to be paid for, causing them to default on the loan and results in an easy payday for the unethical lender.
Other scams include convincing borrowers that they should invest the loan proceeds in risky investment schemes.
Here are some red flags you should be aware of when it comes to reverse mortgage loans:
Warning Signs |
|
|
|
|
|
The best way to avoid being a victim of a reverse mortgage scam is:
- Speak with a HUD-approved independent reverse mortgage counselor
- Read the fine print before signing any loan documents
- Be aware that you have a right to cancel your reverse mortgage loan within three business days of closing for any reason whatsoever. You’ll need to send a request in writing to your lender, who will then have to return any loan expenses you have already paid
- Don’t respond to unsolicited marketing or cold-calling
If you or someone you know is a victim of a reverse mortgage scam, submit a tip to the FBI, file an online complaint with HUD-OIG, or call their hotline at 1-800-347-3735. You can also submit a complaint through the Consumer Financial Protection Bureau by calling 1-855-411-2372.
What is a reverse mortgage?
A reverse mortgage is a loan that allows people 62 years old and older to borrow a portion of their home's equity. The loan comes due when the borrower dies, lives outside of the house for more than 12 months (unless a co-borrower or eligible spouse is living in the property), sells the property, or stops paying taxes and homeowners insurance. You can obtain this type of loan through authorized FHA loan lenders and private lenders.
How does a reverse mortgage work?
Reverse mortgages are disbursed in one lump sum, as a line of credit or as monthly payments. They have certain requirements: borrowers must be 62 or older, maintain the house in good condition and continue to pay property taxes and insurance. If the borrower moves out of the home for more than 12 consecutive months (and a co-borrower or eligible spouse isn't living in the house), fails to comply with other loan requirements, or passes away and the heirs cannot pay the remaining loan balance, the financial institution could initiate foreclosure proceedings.
What is the downside to a reverse mortgage?
The main downside to reverse mortgages is that you're giving up the equity you've built in your home. If your heirs want to keep the home they will need to pay the debt still owed at the time of your death. They will not receive the home as part of their inheritance. Reverse mortgages are also risky in terms of scams, and many borrowers fall victim to predatory practices that can cost them substantial amounts of money or the home itself.
How much money do you get from a reverse mortgage?
The amount of money you will receive from a reverse mortgage depends on several factors, including the market value of your house, and any mortgage loans still owed on it. If you haven't paid off the mortgage in your home, the bank will settle that debt with the reverse mortgage loan and give you the remainder.
How does a reverse mortgage work when you die?
When the borrower passes away, the financial institution explains to the heirs the different options and gives them around 30 days to decide what they want to do with the property. If the spouse of the principal borrower is a co-borrower on the reverse mortgage, they are allowed to stay in the house without paying back the loan.
- A reverse mortgage can be a powerful tool to fund necessary home improvements, pay property taxes or other essential living expenses.
- Reverse mortgages can be accessed through FHA loan lenders and private lenders and are available for homeowners 62 years of age and older.
- These loans can be disbursed as a lump sum payment, as a line of credit or as a monthly annuity.
- Homeowners should be fully aware of the responsibilities, conditions and possible scams when looking for and applying for a reverse mortgage.
- A financial assessment is an important step before applying to see if you’ll be able to afford living expenses, insurance and taxes after taking this type of loan.
PROTECT MY RETIREMENT link