For most people, your home is your biggest investment. Making a decision regarding this important investment can be worrisome. Making up your mind whether a Reverse Mortgage is right for your individual situation should involve learning about the program and getting all of your questions answered. Listed below are the most frequently asked questions & answers…
1) What is a Federal reverse mortgage?
- As people move through different stages of their life, their financial situation changes. You plan and prepare the best you can for the later years but sometimes there are unexpected situations that arise. Maybe an illness occurs, there is a loss of income from the passing of a spouse, maybe you live longer than expected, maybe the cost of living exceeds what you had prepared for…
- The Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD) has developed the Reverse Mortgage program to help those in such a situation.
- A reverse mortgage is a loan for homeowners who are 62 or older to unlock a portion of their home equity into cash. Home Equity Conversation Mortgages (HECM) reverse mortgages are backed by the US Government.
- What makes this loan unique is that it does not require repayment until the homeowner(s) no longer reside at the residence.
2) How does a reverse mortgage work?
- No repayment is due as long as you or a spouse continues to live in your home as your primary residence. You always maintain ownership of your property.
3) How did the Reverse Mortgage program come about?
- In 1989 the Department of Housing & Urban Development (HUD) established the Reverse Mortgage program in response to lobbying efforts of the AARP.
- The goal of the program was to provide a means for seniors to stay in their homes for the remainder of their lives capitalizing on the equity they had built up in the homes after years of making monthly mortgage payments.
- The program was conceived as a means to help people in or near retirement and with limited income use the money they have put into their home to pay off debts (including traditional mortgages), cover basic monthly living expenses or pay for health care.
4) How do I qualify for a reverse mortgage?
- Unlike a traditional forward mortgage, it is relatively easy to obtain a reverse mortgage provided that:
- You are at least 62 years of age or older.
- Your home is your primary residence.
- You have substantial equity in your home.
- There are no income or asset qualifications.
5) How can I determine if a reverse mortgage is right for my specific situation?
- One of the most effective ways to evaluate if a reverse mortgage is right for you is with a no-cost, no-obligation discussion with one of our senior Reverse Mortgage Consultants.
6) Do you need good credit for a reverse mortgage?
- There are no income, asset, employment or credit qualifications because there are no monthly payments due.
- A reverse mortgage is only based on your home’s equity and the borrower’s age. The qualifications are that you must be at least 62 years of age, the home is your primary residence and that the home has enough equity built up.
- Even if you have declared bankruptcy you are still eligible for a HECM reverse mortgage.
7) If I am going through foreclosure can I still qualify for a reverse mortgage?
- As long as you have enough equity built up in your home and are 62 years or older, the HECM reverse mortgage can save your home from foreclosure.
8) Are all types of homes eligible for a reverse mortgage?
- According to FHA guidelines, the following properties are eligible: - Single family homes and 2-4 unit multi-family homes. - Manufactured homes constructed by 1976. - Condominiums on the FHA approved list.
9) Will we have to make monthly payments?
- There are never any monthly payments. If the borrower wants to make monthly payments, they can do this when and if they desire. The financial responsibilities of the homeowner are payments of taxes and insurance.
10) How is a reverse mortgage different from a traditional forward mortgage?
- The significant differences between a reverse mortgage and a forward mortgage is that with a reverse mortgage there are no monthly payments, no income & credit score requirements and the homeowner is not liable to the bank for any loan balance that exceeds the fair market price of the home.
11) How is a reverse mortgage different from a Home Equity Loan?
- The loans are similar only in that they both use the equity you have built up in your home to provide you with available cash funds. The significant differences between a reverse mortgage and a Home Equity Loan are that with a reverse mortgage there are no monthly payments, no income & credit score requirements and the homeowner is not liable to the bank for any loan balance that exceeds the fair market price of the home.
- Additionally, with the reverse mortgage adjustable rate option, the unused balance in your line of credit grows at an interest rate approximately a half of a percentage higher than the rate on your loan.
12) Are reverse mortgages unsafe or predatory?
- There are many safeguards set up for borrowers of reverse mortgages. Reverse mortgages are one of the most regulated of all mortgage loans.
- The government sets a cap on fees and expenses.
- You are required to obtain counseling by an independent third party HUD-approved agency before a reverse mortgage can proceed. In addition, every borrower has a full 3 day right to cancel after signing closing documents.
- All reverse mortgages are “non-recourse” loans so you or your heirs are guaranteed to never owe more than the value of the home.
13) If reverse mortgages are safe and there is such a great benefit, why haven’t I heard more about them?
- The U.S. Government does not advertise it’s benefit programs. Most often word of mouth is the primary source of communication for reverse mortgages.
14) Why do some friends suggest I not obtain a reverse mortgage?
- Much of the negative news associated with the reverse mortgage program is a result of poor practices from the 1980’s before the program was federally regulated and insured.
- Today’s reverse mortgage program is heavily regulated and possibly the safest mortgage program available.
15) How much money can I receive?
- The amount of money you can receive from a reverse mortgage is determined by your home’s value, the age of the youngest homeowner and the current interest rate.
- So a person aged 62 with a high value home will get more than a person aged 62 with a lower value home.
16) Do I have to pay taxes on the funds I receive from the reverse mortgage?
- Payments from a reverse mortgage are not considered earned income, they are a loan advance or proceeds of a loan. Therefore you will not be required to pay income taxes on funds from the reverse mortgage.
17) What can I do with the tax free money?
- You are free to use the proceeds from your reverse mortgage for anything you desire. There are no restrictions.
- The most common uses include:
- Pay off existing mortgage
- Pay off credit card debt
- Supplement your income
- Pay for long term health care insurance
- Make needed home repairs & improvements or life style modifications
- Pay for in-home health care
18) Will I will loose my Medicare or Social Security benefits with a reverse mortgage?
- Money from a reverse mortgage is not considered income, it is a loan advance. Therefore the payments will not affect “entitlement” based government benefits such as Medicare or Social Security. Need-based benefit programs like Medicaid or Supplemental Social Security may be impacted so this must be reviewed with your local area agency on aging and/or a qualified financial advisor since programs vary by state.
19) How do I receive the money?
- With a reverse mortgage you have a number of different payment plan options to choose from:
- Term: Receive equal monthly payments for a fixed period of time that you select (normally 5, 10 or 15 years).
- Tenure: Receive equal monthly payments for as long as you occupy your home as your principle residence.
- Modified Tenure: Set aside a portion of the loan proceeds as a line of credit in addition to monthly payments.
- Lump Sum Cash Advance: Receive all or part of your money in a lump sum upon closing of your reverse mortgage.
- Line of Credit: Draw cash from your reverse mortgage at any time up to the available limit. Interest is only charged after money is accessed. The available line of credit grows at 1.25 percentage points above the interest rate that’s charges on your loan balance.
- The payment plan can be changed for a small fee.
20) How is interest rate charged on a reverse mortgage?
- The interest rate options on a reverse mortgage include adjustable and fixed rates. The adjustable rates are tied to the LIBOR index plus a margin. Interest is charged on your loan balance, which consists of the cash you have received, the initial closing costs, and mortgage insurance. If you select a line of credit, interest is not charged until the money is drawn from the account. The monthly adjusting rate caps at 10 points above the start rate.
21) If I choose the Line of Credit payment option, does the unused balance in the Line of Credit earn any money?
- The unused balance in your Line of Credit grows at an interest rate approximately 1.25% higher than the rate on your loan. The “growth” is not the same as earning interest like a traditional savings account but it will increase the balance of your funds over time.
22) Can the interest charged on my loan principle be deducted for tax purposes?
- The interest accrues and is deductible when the loan balance and interest is repaid when the home no longer is the borrower’s principle residence.
- To make sure your specific situation is properly evaluated, we recommend you speak with a qualified tax advisor.
23) How long does the entire process take to close on a reverse mortgage?
- It normally takes up to 30 days. If there are any unexpected title issues or other unusual circumstances the process can take longer.
24) What costs are involved with a reverse mortgage?
- HUD charges a Mortgage Insurance Premium equal to either 0.5% or 2.5% of the maximum claim amount (depending on mandatory obligations being paid off) and ongoing monthly mortgage insurance equal to 1.25% of the loan balance. The third party closing costs and origination fee varies depending on the program selected.
- Please see the separate page in this website for a more detailed outline of costs involved.
25) What is the benefit of paying the Mortgage Insurance Premium?
- The Mortgage Insurance Premium pays for federal insurance for FHA reverse mortgages which offers valuable protection for the borrower.
- It guarantees that you will continue to receive your monthly payments and will never owe more on your loan than the current market value when it comes time to sell the home.
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27) When does the reverse mortgage need to be repaid?
- The reverse mortgage becomes due and payable when homeowners (the last borrower when there are multiple homeowners) permanently leave the home – move, sell or pass away. Reverse mortgages are typically repaid from the proceeds from the sale of the home, with any remaining equity staying with the homeowner or their heirs.
- If a spouse passes away, the surviving borrowing spouse continues to receive the full benefits of the reverse mortgage, with no repayment until they decide to permanently leave the home.
28) Can I ever owe more than the home is worth?
- Neither you nor your heirs can ever owe more on the reverse mortgage than the market value of your home at the time of repayment.
- If the loan amount ever exceeds the value of the home, the Federal Government would be responsible to make up the difference to the lender. You or your heirs would never be forced to pay any money out of pocket to satisfy the reverse mortgage. Most importantly, you can never leave a debt or lien to your heirs as a result of your reverse mortgage.
29) Will I still have an estate that I can leave to my heirs?
- Since you always retain title to your home, all proceeds from the sale of your home in excess of what you owe belong to your estate, which means the remaining equity in your home can be passed to your heirs.
- When you no longer live in your home, the reverse mortgage becomes due. It is then up to your estate how to repay the reverse mortgage. They can sell the home and use those funds or they can obtain a traditional forward mortgage to refinance the loan. If the home is sold, any amount left after what is owed on the balance of the reverse mortgage belongs to yourself or your estate.
30) How long will my heirs have to sell the property after I pass away?
- As long as the heirs are making a genuine effort to market the home for sale (for example the property must be listed within 90 days), they will have up to a possible three 90 day extensions or up to one year.
31) Do I still own my home?
- This is probably the greatest misconception regarding reverse mortgages. Just like with a traditional mortgage, you maintain the title to your home for the life of the reverse mortgage. The homeowner can sell the home at anytime. The homeowner retains all future value appreciation in the home. As long as your property taxes and insurance are paid and the home is maintained in reasonable condition, you can never be forced out of your home.
32) Can I sell my home once I have the reverse mortgage?
- You can decide to sell you home at any time. When you sell the outstanding balance of the reverse mortgage will be paid at closing and any money exceeding the loan balance belongs to you.
33) What is a Counseling Certificate?
- To qualify for a reverse mortgage you are required to talk with an independent reverse mortgage counselor who provides a certificate of counseling that must be given to the lender. Please see the separate page in this website for a more detailed outline of the Counseling session.
34) What if I have an existing mortgage?
- Any existing mortgage or lien against your title would be paid off out of the proceeds of you reverse mortgage. Therefore since your current mortgage is satisfied, you no longer are required to make monthly mortgage payments.
- For many people the greatest benefit in getting a reverse mortgage is to payoff their current mortgage and eliminate their monthly payment.
35) If I am in foreclosure can I still qualify for a reverse mortgage?
- Even if your current mortgage is delinquent or if you are in the process of a foreclosure, a reverse mortgage can still save your home!
36) Can I ever be forced to move?
- There are only 4 things you must do to guarantee you will never be forced from your home. You need to occupy the home as your primary residence, pay your property taxes & homeowner’s insurance and keep your home in reasonable condition.
37) Can I get a reverse mortgage on a vacation home or investment home?
- Given one of the requirements for a reverse mortgage is that it be your primary residence, a second home would not be eligible.
38) Can I use a reverse mortgage to purchase a home?
- You can purchase a home utilizing a reverse mortgage.
- Please see seperate page in this website for a more detailed explanation of the “For Purchase” option.
39) Will my surviving spouse have to repay the loan when I pass?
- As long as you were joint borrowers on the application for the reverse mortgage, your spouse can continue to live in the home with no payments required. Payments for homeowner’s insurance and property taxes are still required.
40) Can I have more than myself and my spouse on a reverse mortgage?
- Accordingly to FHA guidelines, up to three homeowners can be on title. All homeowners must be at least 62 years old and live in the home as their primary residence.
41) Can I have a non-relative on my reverse mortgage?
- There is no guideline that requires homeowners to be related as long as all homeowners meet the age and occupancy requirements.
42) Will my loan terms change if my loan is sold?
- The terms of your loan can never change. There will be documents signed as part of the closing process that ensures that your loan terms cannot change.
43) Can I be eligible for a reverse mortgage if my title is held in a trust?
- Yes as long as it’s a revocable trust.
44) Are there any prepayment penalties?
- Absolutely none. You may make a full or partial repayment at anytime without any penalty.
45) Is my information kept confidential?
- Any information obtained during the process of securing your reverse mortgage will be stored and communicated in accordance with all applicable federal and state regulations.
- Your private information is important to us. We do not share, sell or otherwise disperse any information you provide.