How Does a Reverse Mortgage Work?
A reverse mortgage is a loan for senior homeowners that uses the home’s equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. Any remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage.
Eligibility For a Reverse Mortgage
To be eligible for a Home Equity Conversion Mortgage (HECM) reverse mortgage, the Federal Housing Administration (FHA) requires that all homeowners be at least age 62. The home must be owned free and clear or all existing liens must be satisfied with proceeds from the reverse mortgage. If there is an existing mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at closing. Generally there are no credit score requirements for a reverse mortgage.
Outliving the Reverse Mortgage
Generally speaking, a reverse mortgage loan cannot be outlived and will not become due, as long as at least one homeowner lives in the home as their primary residence, continues to pay required property taxes and homeowners insurance and maintains the home in accordance with FHA requirements.
In the event of death or in the event that the home ceases to be the primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage loan or put the home up for sale.
If the equity in the home is higher than the balance of the loan when the home is sold to repay the loan, the remaining equity belongs to the estate.
If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA. No other assets are affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage.
The amount that is available generally depends on four factors: age (older is better), current interest rate, appraised value of the home and government imposed lending limits. Use the calculator to estimate how much you could be eligible for.Distribution of Money From a Reverse Mortgage
There are several ways to receive the proceeds from a reverse mortgage.
- Lump sum – a lump sum of cash at closing.
- Tenure – equal monthly payments as long as the homeowner lives in the home.
- Term – equal monthly payments for a fixed number of years.
- Line of Credit – draw any amount at any time until the line of credit is exhausted.
- Any combination of those listed above
Difference Between a Reverse Mortgage and a Home Equity Loan
Generally a home equity loan, a second mortgage, or a home equity line of credit (HELOC) have strict requirements for income and creditworthiness. Also, with other traditional loans the homeowner must still make monthly payments to repay the loans. A reverse mortgage generally has no credit score requirements and instead of making monthly mortgage payments, the homeowner receives cash from the lender.
With a reverse mortgage the amount that can be borrowed is determined by an FHA formula that considers age, the current interest rate, and the appraised value of the home. Typically, the more valuable the home, the higher the loan amount will be, subject to lending limits.To summarize the key differences, with traditional loans the homeowner is still required to make monthly payments, but with a reverse mortgage the loan is typically not due as long as the homeowner lives in the home as their primary residence and continues to meet all loan obligations. With a reverse mortgage no monthly mortgage payments are required, however the homeowner is still responsible for property taxes, insurance, and maintenance.
Reverse Mortgage Benefits:
The funds from the loan can help you pay for your medical expenses.
Continue paying your taxes and insurance and eliminate your monthly mortgage payments for the life of your loan.
Finally be able to afford making improvements and repairs to your home.
Find out how a reverse mortgage can supplement your retirement income.
You can have the funds and financial freedom to enjoy your favorite hobbies.
A reverse mortgage can provide funds to help with other loved ones’ needs.
Discover how a reverse mortgage allows you to:
- Have more money on hand to meet everyday bills and expenses
- Eliminate or reduce credit card balances or other debts
- Help with healthcare expenses, making it easier to age in place
- Set aside funds to pay for future long-term care needs
- Make home updates, repairs or modifications to live more comfortably
- Lower taxable income by replacing taxable withdrawals from 401(k) or other retirement plans with tax-free reverse mortgage income*
- Establish a line of credit for emergencies or occasional expenses
- Use it for any other purpose
Comparing Reverse Mortgages and Personal Loans, Refinance, and Traditional MortgagesWhat option is best for you?
Personal loans are a good way to access a lump sum of cash if you have a large expense to cover right now, but may ultimately cost more in the long run. The same is often true of cash-out refinancing—it can lead to higher monthly payments. Selling your home and downsizing is a smart option to consider if you have a big house that you feel you can no longer maintain, but involves more time and effort to sell and purchase a new one.
The advantage of reverse mortgages is that they are highly regulated by the U.S. Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA) to ensure all borrowers are protected during their retirement years. There are strict qualifications, but if you’re eligible for a reverse mortgage, you are able to tap into your home’s equity and still remain the owner of your home.
Over the years, reverse mortgage loans have evolved to accommodate a number of borrowers. If you’re someone who is struggling to make ends meet, a reverse mortgage loan can help you supplement your cash flow, allow you stay in your home, and eliminate monthly mortgage payments.
Financial Tool for Veterans- Reverse Mortgage
As a veteran, you may be wondering if a reverse mortgage loan could be right for you when the time comes. The HECM reverse mortgage loan was introduced over 30 years ago to provide seniors with a secure financial tool for retirement. But how does it stack up against a home lending tool like the VA Loan, which you may be more familiar with from your original, traditional mortgage? As we will explore, a reverse mortgage loan, while different from what you may be used to, is a compelling tool for veterans.
Designed to allow older homeowners to borrow against the equity in their homes, most reverse mortgages are Home Equity Conversion Mortgages (HECM), insured by the Federal Housing Administration (FHA). These loans are unique in that instead of making payments to the lender, borrowers receive money from the lender that helps them subsidize their retirement savings. You can select the most convenient method for receiving payments (monthly, lump sum, a line of credit), and determine how to best use the funds, whether to cover medical bills, pay other bills, or save for a rainy day. To be eligible for this type of loan, you must be 62 years or older, and have equity in your home among other qualifications.
In contrast, VA Loan rules are directed by the Department of Veteran Affairs (VA) and help service members, veterans, and their families buy, build, repair, retain, or adapt a home for personal occupancy (not as a second or vacation home) using a traditional mortgage. The VA Loan does not require a down payment or monthly mortgage insurance premium. There is also no minimum age qualification, but eligibility for this loan requires that you have suitable credit, adequate income, and a valid Certificate of Eligibility (COE) verifying that you meet the requirements for a VA loan.
Closing Costs & Fees
You often hear about these “unanticipated” payments but in reality, these costs are standard with both traditional and reverse mortgage loans. Some of the fees that you will pay with a reverse mortgage loan are for the home insurance, loan origination, and title insurance. Fortunately, these fees can typically be rolled into the loan total to be financed.
The great news for VA Loan borrowers is that there are some closing costs that a veteran does not need to pay. While you will be expected to pay origination fees, title insurance and several typical closing costs (recording fees, survey, state and local taxes), many additional charges must be paid by the lender (commissions, brokerages fees, preparation fees, and more).
Protecting Your Family
With a reverse mortgage loan, as long as the homeowner continues to meet their loan obligations (including paying real estate taxes, insurance, and upkeep), they will remain in the home and collect all of the loan proceeds. Your heirs and spouse are also protected by the FHA against owing more than the value of the house when it comes due. Perhaps most significantly, as of 2014, an eligible non-borrowing spouse is allowed to remain in the home after the death of his/her spouse, as long as the conditions of the loan continue to be fulfilled.
As with any other traditional mortgage, though, the veteran homeowner will be responsible for the upkeep and any relevant insurances, in addition to property taxes. Unfortunately, traditional mortgages do not have special safeguards in place for the spouses of those veterans who pass away before paying off the loan. If you were to pass away and your spouse could no longer make the necessary payments, and the lender was unwilling or unable to refinance the existing loan, the FHA recommends selling the home quickly to avoid foreclosure.
The Best of Both Worlds
Truthfully, as a veteran, you are in the ideal position to appreciate both types of loans. If you took out a VA Loan for your traditional mortgage, you likely experienced many of the advantages that come with a loan designed specifically for veterans. And now, as you approach retirement or consider ways to enhance your retirement, a reverse mortgage loan gives you the opportunity to pull from the equity that you’ve worked so long to amass in your home. Age-in-place within your own home, enjoy non-taxable cash*, and know that your family is protected.
Crispin and Bernadette Team
883 Sneath Lane, Suite 227, San Bruno, CA 94066