Reverse mortgage loans are a way for homeowners 62 or older borrowers must be 62 years of age or older to convert their home’s value into cash or monthly payments without having to sell or move. Insured by the Department of Housing and Urban Development (HUD) allows these Homeowners to either borrow against the equity of their homes or purchase a new home based on the value or purchase price of that new property.
This is How a Reverse Mortgage works –
- Qualifying homeowners can choose to receive generally tax-free payments from reverse mortgage lenders either on a monthly basis, in a lump sum, or as a line of credit. Consumer should consult a tax adviser.
- Income, assets and liabilities will be verified.
No repayments are required as long as at least one borrower lives in their home as long as taxes, insurance and HOA dues are paid on time and the home is maintained in good condition.
- Social Security and Medicare benefits are not affected.
- Reverse mortgage lenders recover the loan amount, plus accrued interest and mortgage insurance when the last homeowner passes away, chooses to sell the home or a family member chooses to purchase the home (for more details contact me).
- When the loan is paid in full, all remaining equity associated with the property will be distributed to your heirs.
Reverse mortgage borrowers continue to own their homes. Because there are no monthly loan payments due (homeowners must keep property taxes, insurance and HOA dues paid current and must maintain the home as their primary residence), the loan balance grows over time, meaning the remaining equity in the home decreases but your home value continues to increase.
Borrowers must continue to pay homeowner’s insurance and property taxes during the loan period. It is also the borrower’s responsibility to keep up with repairs. In fact, if a borrower fails to adhere to any of these obligations, it may become immediate cause for the loan to become due. In which case, it would become payable in full.
The youngest borrower must be age 62 or older and you must occupy the home as your primary residence for the majority of the year. Borrowers must own the home outright or have a low enough balance on the existing mortgage that it can be paid off from the proceeds of the reverse mortgage.
First of all, your residence must meet HUD property standards. The reverse mortgage must also be the only mortgage or lien held against the residence. That means that if there is a current mortgage or lien on the property, it may be able to be paid off with the proceeds of the reverse mortgage.
- Single Family One-Unit Residences
- 2-4 Unit Owner-Occupied Residences
- Manufactured Homes
The amount of the loan is based on:
- The age of the youngest borrower
- The appraised value of the property and current interest rates
- Income, assets and liabilities will be reviewed
HECM — The Home Equity Conversion Mortgage (HECM) is the only reverse mortgage that is insured by the Federal Housing Administration (FHA). The FHA guarantees that HECM lenders meet their obligations, governs how much HECM lenders may loan to qualified borrowers, and limiting loan costs. Because this is a government insured program, loan counseling is required, by an approved HUD counselor.
- Monthly income for a fixed term, or life
- Line of credit
- Lump sum
- Any combination of the above 3
These basic steps describe the application process.
Your application begins the process with the lender. It specifies fees, interest rates, loan amounts, and more.
At this point you will begin collection the documents required to be approved for the Reverse Mortgage. These may include such things as: mortgage statements, homeowners insurance, survey of your home, bank statements, ID’s, pay stubs or other proof of income and tax returns.
Your lender is not allowed to proceed until you complete mandatory counseling with a HUD approved counselor.
In order to proceed, you will need to know the market value of your property through an FHA-approved appraisal that the lender will order.
For underwriting, legal ownership is confirmed in a title search. If someone remains on the title that no longer lives in the home or is deceased, additional paperwork may be required to clear title. The underwriter will also review the appraisal, the financial assessment and ensure guidelines are met.
At closing, all aspects of the loan are reviewed and signatures obtained on final loan documents with a notary and after a three day waiting period you will typically receive the money, or proceeds, from your reverse mortgage. On a Purchase, the loan will typically fund the same day. On a Refinance, you can choose to receive the payment in one of three ways: as a lump sum, as a monthly payment or as a line of credit. Then it’s up to you: pay bills, fix up the house, help a family member, or use the money to enjoy your life.
With a Reverse Mortgage, you do not have to make any monthly mortgage payments(homeowners must keep property taxes, insurance and HOA dues paid current and must maintain the home as their primary residence). Your credit score is also not the main determining factor for approval. Even if you have been turned down for a regular mortgage you still may qualify for a Reverse Mortgage.
A Reverse Mortgage is one of the safest loans you may possibly have. 95% of all Reverse Mortgages fall into the category of HECM’s (Home Equity Conversion Mortgage) which are insured by the HUD through the US Government. HUD has certain guidelines and protections that regulate the fees, expenses and interest rate you can be charged. You also must attend a counseling session by an approved HUD counselor to give you independent information. Other types of Reverse Mortgages also have similar protections built in.
If the children or heirs want to keep the house once you no longer occupy it they can, payoff the Reverse Mortgage through any means available to them or purchase the home. This is a non-recourse loan so you and your heirs never owe more than the house is worth. They can also sell the house to repay it and keep any remaining equity. We suggest that Reverse Mortgage applicants have a will in place to direct their heirs what to do with the home.With a Reverse Mortgage, not only do you not have to make any monthly mortgage payments (homeowners must keep property taxes, insurance and HOA dues paid current and must maintain the home as their primary residence), you also do not have to worry about credit or income qualifications. Even if you are behind on your mortgage or headed into bankruptcy or foreclosure*, you may still be able to obtain a Reverse Mortgage. *Must meet guideline requirements.
Like any other financial transaction, getting a reverse mortgage involves a number of steps designed to protect both you and the lender. Here are the steps you can expect to go through when you apply for your reverse mortgage:
1. Initial Discussion The first step we like to take is talk with you, either over the phone or in person, about whether a reverse mortgage is right for you. We talk about the pros and cons, how it works, the various options, how much money you might receive and anything else you’d like to know. Then you decide whether you wish to take the next step.
2. Documentation At this point you will begin collection the documents required to be approved for the Reverse Mortgage. These may include such things as: mortgage statements, homeowners insurance, survey of your home, bank statements, ID’s, pay stubs or other proof of income and tax returns. These documents may be provided before or after step 3.
3. Counseling If you decide that a reverse mortgage is the right choice, you will receive counseling from a certified, HUD-approved counselor to make sure that you have had all your questions answered and that there’s been no confusion. A list of available counselors is available from me for your use. It’s a protection device that HUD has built into the process of obtaining a reverse mortgage.
4. Appraisal Once counseling is completed, we arrange for an appraisal to determine the objective market value of your home, and whether any repairs will be required to meet Federal Housing Administration guidelines. In some cases an inspection is required to make sure that the home is structurally sound and that there’s no extensive termite or foundation damage. Sometimes repairs may be required and the costs may possibly be rolled into your reverse mortgage.
5. Underwriting After the appraisal and inspection reports come in we go through all the normal processing procedures that you might find in any mortgage process. The file is sent to an underwriter for review to make sure all guidelines have been met.
6. Closing The final step is the closing with a notary and after a three day waiting period you will typically receive the money, or proceeds, from your reverse mortgage. On a Purchase, the loan will typically fund the same day. On a Refinance, you can choose to receive the payment in one of three ways: as a lump sum, as a monthly payment or as a line of credit. Then it’s up to you: pay bills, fix up the house, help a family member, or use the money to enjoy your life.
These may include: an appraisal fee, title and recording fees, survey if necessary, attorney’s fees and mortgage insurance costs. However, all these costs can be financed into the Reverse Mortgage and not paid out of pocket. You will be provided an estimate of these costs. There are absolutely no so called “junk” fees allowed in a reverse mortgage. On a Purchase there may be additional fees depending on the location of the home and the terms of the contract.
Reverse Mortgages may come in three options based on each individuals amount of equity in the home. The first option, a fixed rate, you may borrow a maximum of 60% of your approved loan amount, the remaining funds will not be available at any time. In the other two options, which are variable rates, one any liens are paid off you may borrow up to 60% or your appraised loan amount (or 10% over your lien pay offs whichever is higher). Then you may choose to either leave the remaining funds in a line of credit or take monthly payments. Whichever works best for you. The variable rate option is based on the LIBOR index. It is a very stable index and can be observed in the financial news each day. A lender’s margin is added to this index each month to calculate that month’s rate. All rates have caps that keep the rate from adjusting too high even though historically, the rate has never come close to the max allowed.
There are several factors that determine the amount you can receive from your Reverse Mortgage. The primary factors are: your age, the age of your spouse, the market value of your home, the current amount owed on the home and the specific Reverse Mortgage program you select. A real estate appraiser will determine the market value based on the sales in your neighborhood among other things. Generally, the older you are, the more of your equity you can access, up to a max at age 90.
There are three basic options for receiving your cash, or you can do a combination:- A one-time lump sum payment after all mortgages or other liens are paid off.- Monthly payments based upon a preset amount of time (after which the payments stop) or a lifetime guaranteed payment similar to an annuity.- A line-of-credit that you may draw from whenever you wish. The balance in the line-of-credit increases each month to take advantage of your home’s appreciation and your increasing age. The funds from your line-of-credit are not added to your loan balance until you withdraw them.
How can I use my Reverse Mortgage proceeds? You can use your Reverse Mortgage proceeds for anything! There are absolutely NO restrictions on how the money may be used. Pay off debt, fix up the house, buy a new car or vacation home, go on an extended trip or simply put the money aside to pay for future health care needs, long-term care insurance or other dreams. It’s your decision.
There are generally no income taxes on any Reverse Mortgage income as most people have already paid taxes on this money in their earlier years. In addition, the Reverse Mortgage income does not affect any regular Social Security or Medicare programs. If you participate in any NEEDS based program such as Medicaid or SSI, you will have to consult with your particular benefits counselor for information on how a Reverse may affect these benefits. Also, if you wish to put your monthly income in a Qualified Income Trust once you have closed, you may still do so. (But check with your elder law specialist)
Just like a traditional mortgage, you retain the title to your home. The lender has no right to any part of your home or its future increases in equity above the payoff of the mortgage (must comply with the terms of the mortgage.) And again, even if you owe more than the home is worth in the end, you or your heirs will NEVER have to reach into your pockets to pay back more than the home can be sold for as this is insured by the HUD/FHA mortgage insurance program There are specific guidelines that must be followed that will be explained.
We adhere to National Reverse Mortgage Lenders Association (NRMLA) standards and a code of conduct that is aimed at protecting the interests of the senior community and their families.We realize that although Reverse Mortgage products can be an excellent financial solution, they may not be the cure all for your financial needs.We strongly encourage all senior candidates to reach out and seek advice from loved ones: family and friends, as well as financial and/or legal advisers regarding their decision to move forward with a Reverse Mortgage. Before a Reverse Mortgage application is written, we will provide you with a list of professionally trained HUD approved counselors, and you will arrange for one them to furnish you with an expert objective overview and discuss with you all the Reverse Mortgage options.Ultimately, our goal is to help our senior clients find the perfect solution for their needs. To do so, we firmly believe in educating our clients to the utmost, and allowing them access to straightforward, objective information and answers.
Yes you may! Please visit RM for Purchase for further information.
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