How A Reverse Mortgage Should Work:
A reverse mortgage can be used for a home purchase, to refinance a current mortgage, or just to cash out equity. With this type of financing, a homeowner does not make any payments toward the loan for as long as he or she resides in the home and meets the requirements of the loan. These requirements include staying current on homeowner’s insurance, property taxes and any necessary home repairs. If a homeowner meets these requirements, he or she will not be responsible for any amount exceeding the loan amount once the loan is due.
If a homeowner has enough equity in his or her home, it can be converted into cash. A homeowner can spend the cash on any expenses they choose and the money received is not considered taxable income. The amount of money a homeowner can receive depends upon his or her age, home value and current interest rates. There are different disbursement options a homeowner can choose from, including monthly payments, a line of credit, a lump sum, or a customized combination plan.
Mortgage Eligibility:
To qualify for this type of financing, a borrower must be financing
their primary residence and be at least 62 years old. This loan does not have minimum credit score or income requirements, so more homeowners are likely to qualify.
All homeowners must attend loan a counseling session before they can take out a reverse home mortgage. The counselor will let the homeowne know what to expect from his or her loan and can answer all of his or her reverse home mortgage questions. Then a homeowner can decide if this loan is the right financing option for him or her.
It is important to note that most lenders want to help older homeowners, not hurt them. A reverse mortgage can be a great solution for older homeowners who are looking for ways to supplement their incomes or improve their lifestyles.
More On Reverse Mortgage Requirements:
The Federal Housing Administration (FHA) requires that those applying
for a HUD reverse mortgage be at least 62 years old. The homeowners must owe no more than approximately 65% of the home’s current value, or own the home outright. If there is a mortgage balance, it can be paid off with the proceeds of the reverse mortgage loan at closing. Income and credit requirements are not required for a reverse mortgage. Eligible kinds of homes Most kinds of homes are eligible for reverse mortgages, but certain requirements must be met for mobile homes. For example, mobile homes must be 30 years old or less, be built on a permanent foundation, and pass FHA inspection. Furthermore, land must also be owned and must meet an FHA inspection. Difference between a reverse mortgage and a home equity loan Home equity loans, second mortgages, or home equity lines of credit have strict income and credit requirements.
A reverse mortgage has no such requirements. Also, with other traditional loans, borrowers must make monthly loan payments. With a reverse mortgage, by contrast, the homeowner receives payments instead of making them. The amount that can be borrowed in a reverse mortgage is calculated with an FHA formula that factors in age, current interest rates, and an appraisal of the home’s value. The higher the value of the home, the higher the loan amount can be, within certain limits. Also, the older the youngest homeowner, the lower the interest rate will be.
As stated above, traditional loans require borrowers to make monthly payments, but with a reverse mortgage the loan is not due as long as the homeowner still lives there.
Also, with a reverse mortgage, banks cannot foreclose on the property or evict the homeowner because of a missed payment. (The homeowner must still pay for real estate taxes, insurance, and maintenance, however.)
The impossibility of outliving a reverse mortgage As long as at least one of the homeowners still lives in a reverse mortgaged home and pays the required taxes and insurance premiums, the loan need not be repaid.
Furthermore, the borrower can never owe more than the home is worth; the borrower cannot be “upside down” in their mortgage because the FHA insures against this. Estates and inheritance If both borrowers die or no longer use the home as their primary residence, the homeowner’s estate can convert the reverse mortgage into a traditional mortgage (in order to keep the house) or sell it to pay off the loan, including the cash borrowed, interest, and applicable fees. If the home is sold for more than the loan balance, the remaining equity belongs to the estate; no other assets are affected by the reverse mortgage.
For example, investments, second homes, cars, and other valuables cannot be taken to pay off the reverse mortgage. If the proceeds of the home sale cannot pay off the reverse mortgage, the lender simply takes a loss and requests a reimbursement from the FHA. Loan limit The amount available for a reverse mortgage depends on three things: age (older is better), current interest rates, and appraised home value.
The loan lasts until the youngest homeowner applying for the loan either dies or moves away from the property, at which point the estate must repay the loan within one year (or sell the home). (Any excess money recouped from the sale of the home beyond the repayment of the loan reverts to the estate. If the home sells at a loss, the estate is not liable for the full amount of the loan.) The maximum amount of the loan is also determined by the age of the youngest homeowner and other factors, as discussed below.
There are a number of ways to receive proceeds from a reverse mortgage,
which can be mixed and matched as desired:
- Lump sum. One large payment of cash when the loan closes
- Term. Monthly payments of equal amounts for a set number of years.
- Tenure. Monthly payments of equal amounts for as long as the homeowner lives in the home.
- Line of credit. Use a line of credit to withdraw funds up to the
approved amount. Borrowers withdraw money quickly or slowly, in large or small amounts, as they choose.
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