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A reverse mortgage doesn’t have to be repaid until the homeowner sells, refinances, or dies.
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A reverse mortgage allows seniors to tap their home equity for cash.
Homeowners must be 62 or older and meet strict financial requirements.
The house itself must also meet requirements related to condition and type of property.
In addition to providing shelter, buying a home is an investment — one of the biggest you will ever make. As with any investment, you expect it to grow in value. When it comes time to tap that value, you have several options, including selling the home, refinancing, or getting a home equity loan.
Another option is a reverse mortgage, a type of loan with unique requirements that allows homeowners to avoid making monthly repayments.
What is a reverse mortgage?
A reverse mortgage, unlike a regular mortgage, requires the lender to pay you from the equity in your home, instead of you paying them. Eventually the lender gets repaid with interest when you move, sell your home, or die. Any balance after the loan is repaid goes to you or your beneficiaries.
Reverse mortgage loans are non-recourse consumer credit obligations, meaning your liability is limited to the proceeds of the sale of your home, according to the Consumer Financial Protection Bureau.
Reverse mortgages come with strict requirements, including a minimum age limit, that protect both you and your lender. This means a reverse mortgage isn’t for everyone.
“Since only seniors age 62 and older qualify for a reverse mortgage, they should remember that it can be an excellent option to supplement retirement funds if most of their net worth is tied to their home and they plan to age in place,” says Jeff Zhou, cofounder and CEO of Fig Loans.
There are three types of reverse mortgages:
Home equity conversion mortgages: HECMs are the most common and are backed by the Federal Housing Administration (FHA).Proprietary reverse mortgages: Also known as jumbo reverse mortgages, these are private loans not backed by the government. They can be used to tap more equity than with an HECM. Single-purpose reverse mortgages: As the name implies, these can only be used for a stated purpose that is approved by the lender. They are backed by local or state governments or nonprofits.
Quick tip: If you currently have a mortgage, it must be paid off with proceeds from any reverse mortgage you obtain, since the reverse mortgage must be the first lien on the property. Most lenders require at least 50% equity for reverse mortgages.
The maximum amount you can borrow on a reverse mortgage is up to $970,800 in 2022, but it ultimately depends on the appraised value of your qualifying home.
Properties that do not qualify for a HECM include vacation homes, second homes, cooperatives, and income-producing properties such as farms.
Reverse mortgage requirements
Since HECMs make up the vast majority of all reverse mortgages, requirements for these federally insured loans are covered below. Requirements for the other types of reverse mortgages are similar to HECMs but have some distinct differences.
“In addition to federal rules governing reverse mortgage loans, 24 states and the District of Columbia have their own rules in the form of state-specific statutes,” says Levon Galstyan, a CPA at Oak View Law Group.
Arizona reverse mortgage law, for example, has rules for financial counseling, disclosures, provisions, repayment terms, borrower obligation, prohibited practices, enforcement methods, and lien priority, Galstyan says.
Here are the main federal requirements for obtaining a reverse mortgage.
1. Age requirements
Reverse mortgages are designed to allow older homeowners to take advantage of the equity they have built up over years of mortgage payments. For government-insured HECMs and for state or local government-sponsored single-purpose loans, the minimum age is 62.
Most jumbo reverse mortgage lenders also require applicants to be 62, but a few offer loans to homeowners as young as 55.
To be a co-borrower on an HECM, your spouse must also be at least 62. If they are not, they can’t sign the loan documents and will be classified as either an eligible non-borrowing spouse or an ineligible non-borrowing spouse.
If your spouse is younger than 62, you should discuss their status with your HUD-approved reverse mortgage counselor.
Important: Eligible non-borrowing spouses are allowed to live in the home after the other spouse dies under the same terms as when the deceased spouse was alive. Ineligible non-borrowing spouses aren’t permitted to live in the house unless they pay off the reverse mortgage loan.
2. Financial requirements
Federally insured reverse mortgage requirements stipulate that you must demonstrate your ability to pay property taxes, homeowners insurance, homeowners association fees, and any required home maintenance. Failure to continually meet these financial requirements could result in defaulting on the loan.
Important: Even though you will no longer be making house payments, you will continue to be responsible for property taxes and homeowners insurance as a reverse mortgage borrower.
Your lender will conduct an assessment to determine whether it believes you will be able to keep up with financial requirements. If the lender has doubts, it can place some of the loan proceeds in a separate account to pay future taxes and other costs.
In addition to meeting loan requirements, you cannot be delinquent on any federal debt. This includes student loans, HUD-insured loans, Small Business Administration loans, and judgment liens against property for a debt owed to the federal government.
Your reverse mortgage loan cannot exceed the value of your home, something your lender is responsible for ensuring. Fees and charges you will be responsible for may include:
Mortgage insurance premiums (2% of the mortgage upfront and 0.5% annually) Real-estate closing costs, including appraisals and inspections Origination fees (capped at $6,000)Interest chargesServicing fees paid to your lender
In most instances, fees can be taken out of loan proceeds. While convenient, it will reduce the amount you receive.
Note: HECMs and most other reverse mortgages do not have minimum credit score or debt-to-income ratio requirements, but your general financial condition is taken into consideration.
In order to be considered for a federally insured HECM, you must agree to counseling with a HUD-approved counselor and pay for it. Counseling is a discussion of eligibility requirements, financial implications, loan repayment, and alternatives to a HECM.
“Not everyone qualifies for these loans, so you must know your alternatives,” Galstyan says. “These include downsizing, refinancing your existing loan, obtaining a second mortgage, and renting a portion of your current residence.”
In the end, you should feel qualified to make an informed decision about whether a reverse mortgage meets your specific needs.
Note: Reverse mortgage counseling costs between $125 and $200. To ensure impartiality, your lender is not permitted to pay for it or participate. You can, however, contact the counseling agency to request a reduced fee due to financial hardship.
3. Housing requirements
To qualify for an HECM, your home must meet several requirements:
Your name must be on the title.You must own the home outright, or be able to pay off the balance with proceeds from the reverse mortgage.It must be your primary residence and you cannot live elsewhere for more than 12 consecutive months, including long-term care facilities.It must be a single-family home or a four-unit maximum multiple family home with one unit occupied by you as your primary residence.It can be a manufactured home or condominium as long as it meets FHA requirements.
The lender must submit the property to HUD for an appraisal and analysis before an HECM can be approved. In some cases, indicated repairs must be completed before the loan is finalized. In addition, the property must be insured, including flood insurance where appropriate.
Quick tip: Regular monthly reverse mortgage payments do not count as income when applying for a VA pension. However, a lump sum reverse mortgage payment could have an impact on pension eligibility.
The bottom line
A reverse mortgage may be a good option if you meet the age requirement, have 50% or more equity in your home, and plan to age in place.
Consider how you plan to use the funds and whether your spouse will be a co-borrower. If you receive government assistance, consider the impact of a reverse mortgage on that cash flow and your eligibility for the program.
Finally, weigh the pros and cons of a reverse mortgage against alternatives including downsizing, refinancing, or a home equity line of credit. Always remember that an informed decision is the best decision.