Who insures Reverse Mortgages? The FHA HECM, Home Equity Conversion Mortgage, is administered through the United States Department of Housing & Urban Development (HUD) and insured by the FHA (Federal Housing Administration).
How do I qualify for a Reverse Mortgage?
You must be at least 62 years of age, own your own home, and use it as your primary residence for at least six months of the year and not be delinquent on any federal debt. What if my spouse is not 62 years of age? Thankfully, through the Reverse Mortgage Stabilization Act of 2013, there has been a change in reverse mortgage parameters so that even IF you have a spouse who is not 62 years of age, you can still do a reverse mortgage. By being listed on the HECM as a non-borrowing spouse, he/she will be protected and be able to remain in the home after your passing, and the reverse mortgage will not become due and payable when the borrower passes away. However, if you have a HECM line of credit, it would no longer be accessible, and any monthly proceeds would end. Speak to your reverse mortgage professional about these issues to see if a Reverse Mortgage is still a viable option for you. You can also refer to the HUD Mortgagee Letter # 2014-07 , April 25, 2014 regarding non-borrowing spouse parameters .
NOTE: Prior to getting a reverse mortgage, consult an attorney to obtain any necessary documents in existence such as will, life estate, power of attorney, marriage certificate (all where applicable) as these documents will be reviewed by an underwriter at the lender especially if there is a non-borrowing spouse.
(See your Reverse Mortgage specialist for more details and to have your questions or concerns answered.)
Note: There are proprietary reverse mortgages for those age 60 years and above, however, the proceeds would be lower especially if you have a sizeable mortgage balance. It is possible you might not qualify.)
Who Benefits from Doing a Reverse Mortgage?
Many people do reverse mortgages in order to make their retirement even better. Some choose a reverse mortgage who are widowed and no longer receive two social security checks, one which was their spouse's. Borrowers who wish to renovate their homes, those with little money set aside for retirement, and those who just want a financial tool to maximize their retirement are all candidates for a reverse mortgage. Many borrowers like the line of credit feature for unforeseen emergencies, knowing the line of credit will be available to them and also grow over time.
What types of homes qualify for a Reverse Mortgage? Single Family homes, 1-4 unit dwellings, townhouses, detached homes, condominiums, PUD's and most manufactured homes are eligible for reverse mortgages. (Condominiums must already be FHA approved, but if they are not, there is a process to get approval with FHA.) (Co-ops are not currently approved for reverse mortgages. Mobile homes are also not eligible for a reverse mortgage as most are not on a permanent foundation. Please refer to our Manufactured Homes page for more.)
If I decide to do a Reverse Mortgage, will there be an inspection of my home? Yes, there will be an inspection of your home known as an appraisal. Your home, inside and out, will be evaluated to determine its value.
Are there any restrictions on the use of funds with a Reverse Mortgage?
No. You can use the proceeds of a reverse mortgage any way you like. Help a family member, travel, pay bills, fix up the house, buy a second home, or pay off your mortgage.
Who Pays My Property Charges on My Home?
You will pay your property taxes, homeowner's insurance, condo fees where applicable, flood insurance, HOA fees, etc. but you can also request these to be escrowed. Additionally, you must be able to show (through providing documentation to the lender) that you are able to pay your real estate taxes, homeowner's insurance, flood insurance where applicable, condo fees, HOA fees, and any fees related to owning your home.
How much money can I borrow?
That depends on a few factors: age of the youngest borrower, the appraised value of your home, current interest rates, and balances on any current liens (mortgages, equity loans, judgments). Naturally, you do not receive ALL the equity or the entire lending limit or there would be no equity left. But the older you are, the more money you receive of the current lending limit. So if your home is worth $765,600 (which is the current max lending limit) and you are in your nineties, you would receive more proceeds than if you were only in your sixties. Now, there are also reverse mortgage JUMBO loans for homes in the millions up to a lending limit of $4,000,000 and home values up to $10,000,000, and that can often work out better for some borrowers than the standard reverse mortgage. (Note: The FHA max lending limit is changing in 2021 to $822,375 which will help higher value homes. (See HUD Mortgagee Letter. Hud.gov/pressrelease-12-2-2020
What is an Index Used by HECM Mortgage Lenders on Adjustable Rate Mortgages?
A mortgage index is the benchmark interest rate an adjustable-rate mortgage's fully indexed interest rate is based on. An adjustable-rate mortgage's interest rate consists of an index value plus an ARM margin. The margin tends to be constant, but the index's value is variable. Several benchmark interest rates serve as mortgage indexes. For example, the CMT (Constant Maturity Index) and the LIBOR (London Interbank Offered Rate) are two of some of the indexes used by mortgage lenders. The CMT index is now used for the HECM program.
What is a Margin Used by HECM Mortgage Lenders on Adjustable Rate Mortgages?
The margin is the number of percentage points added to an index by the mortgage lender to set your interest rate on an adjustable-rate mortgage (ARM). The margin is set in your loan agreement and will not change after closing. The margin amount depends on the particular lender and loan. To calculate your interest rate, lenders use two numbers: the index and the margin. Index + Margin = Your Fully Indexed Rate. At any point in your loan, you can calculate your interest by adding together the current index and the lender's margin together giving you your interest rate.
How is my money disbursed to me?
HUD has designed the HECM program with two choices of HECM'S. HUD offers the Fixed Rate HECM and the Adjustable Rate HECM. Each has its advantages. The FIXED rate doesn't have the flexibility of the ARM option. There is no line of credit available, there is no monthly payment option, and no other types of disbursement options. It is a basic cash out and limited to a one-time lump sum disbursement with no other disbursements available after that.
The Adjustable Rate HECM has several options so you can tailor your proceeds as you wish. On this HECM, your proceeds come in two disbursements, one limited to funds the first year and another draw of your proceeds 365 after closing. I will explain how this works although it does get technical: (NOTE: On all HECM for Purchases, all the cash out come as one lump sum in one transaction at closing.)
Disbursements at loan closing are limited within the first 12 months of closing and CANNOT EXCEED THE GREATER OF: 60% of the Principal Limit or Mandatory obligations plus 10% of the Principal Limit. This pertains to ALL payment options, including lump sum, term, tenure, line of credit, modified term and modified tenure. Note: Borrowers with outstanding mortgages in excess of 60% can still take the additional 10%, as long as disbursements do not exceed the Net Principal Limit or Principal Limit.
IMPORTANT: If the borrower takes more than 60% of the Principal Limit, the cost of MIP or Mortgage Insurance increases significantly. If the disbursement is 60% or less, MIP is 0.50 of the Principal Limit. It increases to 2.00% if the disbursement exceeds 60%. Mandatory obligations for traditional and refinance transactions include customary closing costs, plus any liens on the property, and so forth.
The remaining portion of your HECM proceeds are available from a line of credit set up for you and can be accessed 365 days after closing. With the Fixed HECM, you get no second disbursement, so you are leaving money on the table and not receiving as much as with the HECM ARM.
Reverse mortgage options for disbursement of your proceeds:
You may choose a lump sum, fixed monthly payments (tenure), a line of credit, or a combination of all three. There are other ways to maximize your proceeds:
Modified tenure: Set up a line of credit and also receive a monthly payment for as long as you and your co-borrower live in the home.
Modified term. Add a line of credit along with monthly payments for a specified amount of years. You can choose to have your money disbursed over a shorter period rather than over the term of the loan. A shorter loan term will increase your monthly proceeds. Although with term loans, the monthly payments cease when the term expires, you still remain in your home and on title.
How long does it take to close a Reverse Mortgage?
It generally takes 30-60 days to close a Reverse Mortgage depending on varying circumstances. Any application with special circumstances involves more care and can take longer.
What happens at the closing? Mortgage documents are signed at the closing, and taxes are paid if due. You receive your proceeds after a three day right to cancel period known as the right of rescission period.
Does the lender own my home?
No, the lender does NOT own your home. Just as with any mortgage on your home, you retain title as the owner, not the bank.
How will the proceeds from a Reverse Mortgage affect my taxes, social security, or other benefits?
Proceeds from a reverse mortgage are not considered taxable income so your income taxes are not affected. Your Social Security and Medicare benefits are also not affected. The impact on other federal, state, or local assistance programs such as Medicaid should be discussed with a financial advisor. NOTE: Your Medicaid benefits may be affected if your Reverse Mortgage proceeds are not spent down in the month they are received. (Check with your tax advisor.)
Who Pays My Real Estate Taxes If I Take Out a Reverse Mortgage?
You continue to pay your real estate taxes along with your homeowner's insurance and maintain your property. If you live in a condo or are part of an association, those fees must also be paid. (We will discuss a way to have your taxes set aside in escrow to be paid by the lender in another section of this website.)
My wife is not yet 62. Can I still get a Reverse Mortgage? What happens if I pass away? With the new regulations FHA has put in place, spouses under the age of 62 and not listed on the HECM reverse mortgage can remain in the home after a borrower passes away through a deferral period set by HUD. The remaining spouse will be required to keep paying taxes and homeowners insurance on the home as well as maintain the home. There are other parameters. (HUD Mortgagee Letter 2014-07 , April 25 , 2014).
Can I deduct the Reverse Mortgage interest from my income taxes? Will my heirs have to pay tax on the proceeds I received from my Reverse Mortgage?
Because you are not currently paying interest on your reverse mortgage through mortgage payments, you will be unable to deduct the interest from your income taxes. However, your heirs may be able to deduct all or a portion of the interest that has accrued, however, they will need to consult a tax advisor. Reverse mortgage proceeds are tax free; there is no tax on the proceeds.
When is the Reverse Mortgage repaid? Repayment occurs when your home is no longer your primary residence or when the loan is refinanced. This includes the death of the last borrower or when the borrowers move or refinance. This is known as a maturity event.
What will I owe at the end?
What monies are owed the lender at the end of the reverse mortgage are as follows: Principal, interest, mortgage insurance, and monthly services fees (if any were charged) that have accrued over the life of the loan.
What if I owe more than my home is worth when I sell?
A Reverse mortgage is a "non-recourse" loan which means the house stands for the debt. You can never owe more than your home is worth upon the sale of the property even if your home's value is less than what is owed the lender. Mortgage insurance, required by the FHA, protects borrowers from owing more than the value of the home. And lenders become whole if there is a loss through FHA Mortgage Insurance.
