What is a Reverse Mortgage?
A Reverse Mortgage is a loan that allows senior homeowners to access a portion of their home’s equity to supplement their retirement income. The loan generally does not have to be repaid until the last surviving homeowner on title permanently moves out of the property or passes away. At that time, the estate can repay the balance of the reverse mortgage loan or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage loan.
Eligibility for a reverse mortgage loan
To be eligible for a Home Equity Conversion Mortgage (HECM) reverse mortgage loan, all homeowners must be at least 62 or older. The home must be owned free and clear or all existing liens and mandatory obligations would need to be satisfied. If there is a mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at the closing.
Eligible home types
Many home types are eligible: one to four unit* owner-occupied homes and approved townhomes, condominiums and manufactured homes.
Difference between a reverse mortgage and a home equity loan
With traditional loans such as a home equity loan, a second mortgage, or a home equity line of credit (HELOC), the homeowner must still make monthly payments to repay the loans. However with a reverse mortgage loan, instead of making monthly mortgage payments to the lender, the borrower uses the loan proceeds to pay off any existing mortgage and other mandatory obligations.
With a reverse mortgage loan the amount that may be borrowed is determined by a formula that considers the borrower’s age, the current interest rate, and the lesser of the appraised value of the home, sale price or the maximum lending limit. The funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements. Generally, the higher the value of the home, the higher the loan amount will be, up to the FHA’s maximum lending limits. The loan is typically not due as long as the homeowner lives in the home as their primary residence, continues to pay property taxes and insurance and maintains the home according to FHA guidelines.
Typically, the loan does not become due as long as one of the borrowers on title lives in the home as their primary residence and maintains the home in accordance with FHA requirements such as keeping property taxes and insurance current, and keeping up with repairs.
In the event of death or the home ceases to be the primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage loan and keep the home or put the home up for sale in order to repay the loan.
If the equity in the home is higher than the balance of the loan, the remaining equity belongs to the heirs/estate.
If the sale of the home is not enough to pay off the reverse mortgage balance, the heirs or estate will not be responsible for the difference. 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.
Available loan proceeds
The amount that is available depends on many factors, such as: age, current interest rate, and the lesser of the appraised value of the home, the sale price or FHA maximum lending limits. The funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements. Use our reverse mortgage calculator to estimate how much you could receive.
Distribution of money from a reverse mortgage loan
There are several ways to receive the proceeds from a reverse mortgage loan:
Lump sum – a lump sum of cash at closing
Tenure – equal monthly payments as long as the homeowner lives in the home
Term – equal monthly payments for a fixed period of months
Line of Credit – draw any amount at any time until the line of credit is exhausted
Any combination of those listed above.
Borrowers may access a minimum of 60 percent of the principal limit amount for the first 12 months after loan closing. Borrowers may be eligible to access an additional 10 percent, subject to additional HECM requirements, of the principal limit amount for the first 12 months after loan closing.
The principal limit is the amount of funds available to the borrower through a HECM loan.
*Not applicable to HECM for Purchase