Reverse Mortgage

A Reverse Mortgage allows you to convert part of your home's equity into cash without selling your home. This mortgage loan is ideal if you plan to stay in your home and need extra funds.

Key Points:

• Eligibility: Available to homeowners 62 years or older.
• Repayment: No monthly mortgage payments required as long as you live in the home.
• Ownership: You retain the title and continue living in your home.
• Payment Options: Funds can be received as a lump sum, in monthly installments, as a line of credit, or a combination of these.
• Costs: Includes origination fees, closing costs, and mortgage insurance, which are rolled into the loan.
• Financial Impact: The money received is tax-free and generally does not affect Social Security or Medicare. However, it might impact Medicaid or SSI benefits.

Loan Repayment: The loan is repaid when the home is sold, or the homeowner moves out or passes away. If the sale proceeds do not cover the loan amount, FHA insurance covers the difference, ensuring no debt is passed to heirs.

Reverse mortgages offer several advantages tailored for retirees:

• No Credit Score Required: You don't need a minimum credit score to qualify.
• Flexible Financial Requirements: There's no debt-to-income ratio limit, though you must show you can handle home-related expenses.
• Freedom in Retirement: Use the funds however you wish, whether for medical expenses, investments, or boosting retirement income.
• Non-Recourse Loan: The lender can only claim the collateral (your home) if you default, protecting your other assets.
• Preserve Savings: Helps maintain your savings and can improve your monthly cash flow.
• Relocation Flexibility: Enables you to move to a new city or closer to family.
• Adaptable Living: Facilitates moving to a more suitable home, whether it's more affordable, easier to maintain, or better equipped for your physical needs.
• Age in Place: Allows you to remain in your current home.
• Tax-Free Money: The funds received are not taxed as income, providing more financial flexibility.

Qualification Requirements:

• Age: Borrowers must be 62 years or older. For couples, the age of the youngest borrower is used.
• Homeownership Costs: You must be able to pay ongoing costs like taxes, insurance, and possibly HOA fees.
• Primary Residence: The property must be your primary residence, either owned outright or with significant equity (typically at least 50%).
• Property Maintenance: You must maintain the property and cover any associated fees.
• Counseling: HUD mandates independent counseling to ensure borrowers understand the Reverse mortgage process, costs, and implications on benefits like Medicaid. Counseling sessions typically last 90 minutes and cost around $125.

Costs Involved:

• Origination Fee: Capped by FHA rules, fees vary based on home value but cannot exceed $6,000.
• Interest: Often adjustable, except for lump sum options which have a fixed rate.
• Closing Costs: Includes variable lender fees like appraisals and credit checks.
• Mortgage Insurance: Includes an upfront premium at closing and a monthly premium of 1.25% of the loan balance.

Lump Sum: Get all your funds at once when the loan closes. This is the only option with a fixed interest rate.

Equal Monthly Payments: Receive steady monthly payments for as long as you live in your home.

Line of Credit: Similar to a credit card, draw funds as needed and pay interest only on the amount you use.

Term Payments: Get fixed monthly payments for a set period agreed upon with your lender.

Monthly Payments Plus Line of Credit: Combine steady monthly payments with access to a line of credit for additional funds as needed.

Term Payments Plus Line of Credit: Receive fixed monthly payments for a set period, with the option to draw additional funds from a line of credit.

Flexible Combinations: You can also mix options, like receiving a partial lump sum upfront and the rest in installments. Note that for lump sums and lines of credit, there may be a first-year withdrawal limit of 60% to help protect borrowers.

Should I check credentials? 

Always check the credentials of any lender or banker. Look up their online presence, read reviews, and verify their license and business status through reliable sources like the Better Business Bureau.

Do I need to consult a trusted advisor? 

Discuss any financial decisions with trusted family members or professionals such as attorneys or financial advisors who have your best interests at heart. Engage in independent counseling to understand the nuances of Reverse Mortgages, whether mandatory or not. The HUD offers resources and assistance programs to help you make informed decisions.

Does the VA offer Reverse Mortgages?

The VA does not offer Reverse Mortgages. Be cautious of anyone claiming to provide VA-approved Reverse Mortgages.

What happens when the owner of a Reverse Mortgage passes away?

If there are two co-borrowers, the surviving one can continue living in the home and receiving payments. If a sole borrower passes away, the surviving spouse may need to repay the loan soon after. If both borrowers pass away, heirs must either sell the home to pay off the loan or refinance it if they wish to keep it.

How can you buyout a Reverse Mortgage?

You can pay off a Reverse Mortgage by selling the home or using other funds to cover the loan balance, including interest. There’s no penalty for early repayment. Alternatively, you can refinance the loan, either into another reverse mortgage with better terms or into a conventional loan, after 12 months as per HUD regulations.

Will a Reverse Mortgage affect my benefits?

A Reverse Mortgage doesn’t impact Social Security or Medicare but could affect Medicaid or Supplemental Security Income (SSI) eligibility, as these are based on income and assets.

Can a Reverse Mortgage be foreclosed?

Yes, foreclosure can occur after a maturity event such as the owners passing away, relocation to an assisted living facility, or significant deterioration of the property.