WHO IS IT FOR?
Reverse mortgages are best suited for people older than 62 who own their homes or have little of their mortgage left to pay, have no plans of moving or selling their house, and don’t prioritize leaving their home as an inheritance to their heirs.
Although the minimum age to qualify is 62, consumers will benefit more from a reverse mortgage loan if they apply for it later in life. Since age is one of the factors that determines how much money a borrower gets, getting a reverse mortgage after 62 means there will be more funds available to the applicant.
Applying early can be detrimental for borrowers since there is a higher chance their mortgage funds run out early and that can lead them to lose their homes due to foreclosure.
HOW DOES A REVERSE MORTGAGE DIFFER FROM A HOME EQUITY LOAN?
Home equity loans are loans that utilize the equity in a home as a form of collateral. They are essentially second mortgages that must be paid back alongside the first outstanding loan.
Reverse mortgages are also based on a home's equity, yet they are insured by the federal government and don't have to be paid back until the homeowner moves or passes away.
Reverse mortgages are only available to homeowners over the age of 62. These loans enable the conversion of home equity into cash, usually for the sake of supplemental retirement income. Unlike traditional mortgages, this type of loan increases in value over time.
While reverse mortgages for veterans are managed by the United States Department of Veterans’ Affairs, normal reverse mortgages or Home Equity Conversion Mortgages (HECMs) are insured by the Federal Housing Administration (FHA).
What's more, the government requires potential HECM borrowers to attend counseling at agencies individually approved by the United States Department of Housing and Urban Development (HUD) in order to help them fully understand the process and navigate the bureaucracy.
WHAT ARE THE REQUIREMENTS FOR A REVERSE MORTGAGE?
In addition to the minimum age requirement of 62, as well as compulsory attendance to a HECM counseling session, the FHA requires that those seeking reverse mortgages meet certain additional qualifying criteria.
First and foremost, the home whose equity is being disbursed must be the applicant's primary residence). If multiple borrowers are listed, then they must be legally married. If unmarried, the other spouse must be listed as an ineligible resident.
In regards to the property itself, it must meet all FHA-mandated property laws and flood standards. Furthermore, it is expected that the homeowner continues to pay all relevant costs during the reverse mortgage disbursement. These costs may include property taxes, homeowner’s insurance, and fees associated with maintenance.
The requirements for a reverse mortgage also have something to do with the borrower in question. Is he or she up-to-date on any federal debts? Is the property owned outright, or has the borrower nearly finished paying off the mortgage?
These are inquiries that will be examined at the beginning of the application process. Moreover, lending agencies will also appraise a borrower’s proof of income, including paychecks and bank records, pension payments, 401(k) funds, social security income, and other retirement-centric statements.
ARE THERE ALTERNATIVES?
To determine if a reverse mortgage is right for a consumer, it’s important to weigh the term of the loan against all available alternatives. Customers can research this individually, but it’s recommended that they contact a reverse mortgage counselor approved by the HUD.
These counselors are federally approved and have the most up-to-date information on reverse mortgages at hand. Reverse mortgage lenders are legally obligated to provide potential customers with a list of HUD-approved counselors so that they can make an informed decision about the financial options that best suit their needs.
There are various other options for retirees besides a reverse mortgage, including:
- lowering their expenses
- downsizing
- home equity loans
- refinancing
Lowering Expenses
Depending on the state, customers can find different programs that help out seniors with their daily expenses. Some of these programs include aids for transportation, disability programs, home repairs, and modification assistance, nutrition counseling, and even meal deliveries.
Also, most states offer tax-reduction programs for seniors, helping them with their property tax payments through different means. However, most of these programs have specific qualification requirements, so it’s important for prospective borrowers to check their eligibility.
Downsizing
Customers can opt to sell their home and relocate to a smaller, more affordable property. This helps customers lower their expenses and, depending on how much their house is sold for, the proceeds can be used for rent and long-term care costs, or to help buy the new home.
Downsizing can be a great option for those who live far away from their families or caregivers since it gives them the option of finding a home or apartment closer to their loved ones. The downside of this option is that, just like a reverse mortgage, borrowers would lose the right to pass down the property to their heirs.
Home Equity Loan
This option is somewhat similar to a reverse mortgage since it uses a borrower’s home equity as a source of income. There are two ways a customer can ask for a home equity loan: as a lump sum or as a line of credit. A lump sum means that customers get a large sum of money up front, but this amount is lower than the total equity available. With a line of credit, on the other hand, a customer has access to the highest loan amount available, and they can borrow what they need when they need it.
Lower interest rates make a home equity loan a cheaper alternative to a reverse mortgage, but that doesn’t mean there aren’t any disadvantages. Lump sum loans have to be paid monthly, meaning the borrower will need to pay close attention to all due dates until the loan is paid off. The line of credit option is more flexible as the consumer can make smaller payments at first.
However, after a few years, the payment process will become fixed, meaning the borrower will have to follow a stricter payment plan. Flexibility also comes at a price, since the loan’s interest rate can increase or decrease as time goes by. The consequences of missing a loan payment are the same as for a reverse mortgage, meaning there’s a chance a borrower can lose their home to foreclosure.
Refinancing
This option helps borrowers lower their mortgage payments by modifying their current loan terms with more beneficial ones. Typically, the loan is restructured so that the borrower pays less throughout a lengthier time period. This option can be cheaper than a reverse mortgage, but closing costs are usually added to the new loan balance, increasing the cost of the loan. Also, customers about to retire could find refinancing troublesome, since it extends their loan payoff date.
WHAT HAPPENS IF THE LOAN APPLICATION IS APPROVED?
While it varies by lender, a loan application will usually take approximately 30 days to be approved. Under normal HECM requirements, the borrower can expect a borrowing limit of $679,650. That said, the value that can actually be used will typically be capped at 60% of the borrowing limit. The exact number is calculated based on the borrower’s age, the appraised value of the property, and the set interest rate.
Once the specifics of the loan are presented, and if they’re amenable, the borrower will need to select his or her preferred method of disbursement. Since the premise of reverse mortgages revolves around turning equity into cash, this can be a point of deliberation. In this regard, options will vary based on whether the reverse mortgage in question has a fixed or adjustable rate.
In the event of a fixed-rate reverse mortgage, there is only one payment option— a lump sum payment. Upon closing the loan, the borrower will receive a one-time payment encompassing the entirety of the agreed-upon amount. Rather than a supplemental source of income, this type of disbursement is excellent for urgent financial matters, including paying off debt and covering emergency medical fees.
There are more payment options for adjustable-rate reverse mortgages. Possibilities also include disbursement as a line of credit, meaning the borrower can extract a variable amount at unspecified intervals.
Other choices involve term and tenure payments. Term payments indicate the borrower’s desire for payments of fixed amounts for a fixed interval of time. These types of payments, on the other hand, allow for set disbursement amounts until such time as the borrower no longer maintains residence within the property. Furthermore, both term and tenure disbursement options can be modified to include associated lines of credit.
Getting a HECM loan is a decision that shouldn’t be taken lightly. If you’re interested, you should first speak to a HUD-approved counselor so that you can go through all the available options. Once you’re certain a reverse mortgage is right for you, you can compare lenders until you find the one that best suits your needs.