A reverse mortgage is a loan available to seniors aged 62 or older, per HUD, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves, they can be out of the home for up to 364 consecutive days.
In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term the mortgage has been paid in full and the property is released from the lender and becomes fully and solely owned by the homeowner. In a reverse mortgage, the home owner makes no payments aside from property taxes, and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month. If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home. In certain countries (including the United States), however, a reverse mortgage must be the only mortgage on the property. Most lenders put a lien of close to 300% of the amount funded in the transaction, so very rarely do they allow a “refi” type event to “capture” more equity. It is generally a one time event. The lender will require the loan satisfied and paid in full before they will offer a loan somewhere else. You will have to be in good standing with HUD as well.
To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age. The home owner must qualify for the ability to “afford the home”, to cover taxes, insurance, utilities, water, gas, etc. For most reverse mortgages, the money can be used for any purpose; however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds. A pending bankruptcy which has not been finalized may, however, slow the process. Some types of dwellings do not qualify, while others (like mobile homes) have special requirements (such as being on an approved permanent foundation and built after 1976) in order to be approved. Before borrowing, applicants must seek third party financial counseling from a source which is approved by the Department of Housing and Urban Development (HUD). The counseling is a both safeguard for the borrower and his/her family, to make sure the borrower completely understands what a reverse mortgage is and how one is obtained and so the home owner is alerted to the possibility of fraud. The current lending limit (the maximum the home can be appraised for, no matter how much it is worth) is $625,500. This was increased in 2009, after being raised from $200,000 to $417,000 in 2008. The maximum an originator can charge for a loan origination fee on a reverse mortgage is $6,000.
The inside scoop on reverse mortgage counseling
HUD certifies housing counselors around the country to give homeowners impartial education about reverse mortgages. Reverse mortgage counseling is a mandatory part of the reverse mortgage application process and is typically completed just before or after completing an application for a reverse mortgage. Reverse mortgage counseling can be done over the phone with one of the national counseling agencies or it can be done face-to-face with a regional agency.
After the counseling session, the counselor will mail a signed copy of the HECM Counseling Certificate to the homeowner. This certificate is presented to the lender with the reverse mortgage application.
Many counselors have dropped their service charge from $125, to $89. Lenders are not permitted to pay this fee for applicants. However, under certain circumstances the fee can be reimbursed to the applicant at closing.
There are several advantages, and disadvantages, to taking out a reverse mortgage on your home.
What does it take to apply?
Reverse mortgage counseling is a mandatory part of the reverse mortgage application process and is typically completed just before completing an application for a reverse mortgage. Reverse mortgage counseling can be done over the phone with one of the national counseling agencies or it can be done face-to-face with a regional agency.
The borrower completes a certified HUD Reverse Mortgage application. This application is provided by the Reverse Mortgage lender and is in compliance with FHA / HUD guidelines.
An appraisal is ordered through a certified appraisal management company (AMC). The appraiser schedules a time at your convenience to inspect the property. The appraiser completes the report then sends it to the AMC. The Reverse Mortgage Lender has no control over, nor can influence, the value of the home. The appraisal value is determined strictly by the appraiser.
Upon completion of a Reverse Mortgage application, processing and underwriting begins. Processing consists of clerical duties within the Reverse Mortgage office. Underwriting is the assessment of the processing and the borrowers criteria in hopes of approving the loan.
Upon completion of the conditions the loan is ready to close. All reverse mortgages have a 3 day right of recission. You will have 3 days after the signing to change your mind and close the loan. After the recission period, funds are dispersed to the method you disclosed at the closing.
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In the event of death or in the event that the home ceases to be the primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage or put the home up for sale. If the equity in the home is higher than the balance of the loan, the remaining equity belongs to the estate. If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA. No other assets are affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage. If the borrower leaves the home to a family member, the family member then has the option to either pay off the existing loan balance, or sell the home and keep the difference. The inheritor does not assume responsibility for any debt, nor ever has to pay off the existing balance from the reverse mortgage.
Typically borrowers with Reverse Mortgages do not lose their homes. As long as the borrower stays current with their property taxes and maintains the property as their primary residence, the loan will not become due. If these obligations are not met, the loan becomes due and borrowers may not have the ability to pay off the existing loan balance. Therefore, they may lose their home.
Generally speaking, it may take anywhere from 3 - 6 weeks to complete a reverse mortgage. This is dependent upon the difficulty of the loan, the competence of the lender, and the cooperation of the borrower.
Yes you can, there are no prepayment penalties for paying off the loan early or for making interest payments. The purpose of the loan is to allow you to improve your retirement, so I would recommend you consider keeping some of the money to create a savings account and or to invest (invest in yourself as well as you will only retire once).
Taking out a HECM reverse mortgage to purchase a home is an excellent decision compared to paying for the property with only cash or with a regular mortgage (since with the reverse mortgage you wont have any mortgage payments). There will be a down payment made equal to roughly 40-50% then the remaining funds will be the reverse loan from a lender. This may be a better option than paying for the home with all cash as it allows you to buy the home while also keeping more of your money for your retirement.
You are in full control, the amount you borrow to how you receive these funds is completely up to you, any portions which are not borrowed belong to you – and any future equity (if value increases) also belongs to you. 1.) Lifetime monthly income 2.) Credit line – where you only pay interest on the portion borrowed 3.) Lump sum – receive the max as an upfront lump sum There are 6 different payment options – All of these options are available to all reverse mortgage borrowers.:
Currently, Wells Fargo does not offer reverse mortgages and we are not affiliated with them.