In simpler terms, a reverse mortgage allows a homeowner to borrow money and use his property as a collateral. The money that is paid by the lender is equal to the value of the property of the homeowner.
As the name suggests, a reverse mortgage is totally opposite to the conventional mortgage. Unlike conventional mortgage in which the borrower pays the lender a definite monthly amount to pay down the loan, in the reverse mortgage, the lender has to pay money to the borrower without expecting any monthly payments. Even if the parties agree on a monthly payment, that is done as a percentage of the total value of the home.
The difference in them also lies in terms of home equity. In reverse mortgage, the equity of the house decreases compared to the loan capital while in the conventional mortgage, the equity of the house builds up as the borrower pays down the loan amount in the form of the monthly payments.
Talking about the eligibility for a reverse mortgage, senior homeowners of 62 or more age are eligible to receive the loan. They get to stay in the house as long as they are alive or as long as the last heir of the house is alive. That is why the age of the youngest of the couple is considered in the process of the loan.
Also, during the stay of the borrower in the property, he or she has to pay all the utilities and taxes that concern it and maintain the house as per the requirements of the Federal Housing Administration. If he or she fails to comply with these norms, the result would be nothing but a foreclosure.
That was a short overview of what a reverse mortgage is and how does a reverse mortgage work. Let’s delve deeper into reverse mortgage starting with the eligibility.
1. Eligibility for a reverse mortgage
We already stated that seniors who are 62 or more years old are eligible to receive the loan. There are other requirements also, however.
- If you fulfill the age limit, you must own the home and have it as your primary residence to acquire the loan.
- The amount of your existing mortgage must be small, although a paid mortgage is preferred.
- The condition of your home is good enough to discourage any extra repairing or renovating costs.
- The property to be used as a collateral has to be either a single family, a multi-family, a manufactured house, or a condominium. If it is a condominium, it has to be approved.
2. Types of reverse mortgage
There are three primary types of reverse mortgage.
a. Single-purpose loan
This type of mortgage is usually suitable for those seniors who have either a low or a moderate income. It is offered by certain agencies that are owned by the state or the government or by non-profit organizations.
The Home Equity Conversion Mortgages or the HECMs are federally insured loans and are quite popular. In fact, this type of reverse mortgage is the most common among borrowers and it is the only reverse mortgage that is insured by the US government. The institutions that are involved in offering these mortgages are private banks and they do not impose any income limitations or dictate how the income has to be used. However, this does not mean that there aren’t any restrictions. The amount of the loan to be paid is limited to $625,500 or a certain percentage of the maximum appraised value of the house and this is particularly the only drawback of HECMs.
c. Propriety reverse mortgages
The loan received in this type of mortgage is more than the HECMs. Many financial institutes offer these loans; however, since they are not federally insured, there are certain risks involved. Also, this makes the loans far too expensive for a small house owner. Therefore, those homeowners that have a higher home value prefer acquiring propriety reverse mortgages.
3. The amount of reverse mortgage
The amount that you’d receive as a reverse mortgage depends on the following factors.
- Your age or the age of the youngest borrower in case if you are involving your spouse in the process. If you are 80 years old, you’d be eligible to receive more loan as compared to a 62 years old individual.
- Whether you have any liquid assets or not. If you don’t have them, the borrower would simply keep a certain amount of the loan to meet all the expenses of insurance or taxes.
- Your credit history, credit score, financial status and obligations, and income. However, do remember that only certain mortgage lenders use these parameters to evaluate if the loan can be processed or how much amount can be processed.
- The current interest rate in the state where the property is located.
- The loan amount to be lent (like in HECMs).
- The appraisal value of the house.
4. The involvement of the government
The reverse mortgage is by no means a loan that is issued or processed by the federal government. Instead, the Federal Housing Administration is only involved in the whole process on the insurance level, such as in the HECMs. This means that it only makes sure that the borrower receives the loan amount to which he or she is entitled, that the lender is saved from bankruptcy and that the amount of the loan does not exceed the appraisal value of the house. In an event where there is a difference between the two, the FHA pays it. The government is indirectly involved in the process and this is why it requires you to go through mortgage counseling before you acquire the reverse mortgage.
For that, you can take the services of the private counseling agencies that are approved by the FHA. The counselors working for those agencies would guide you on the different requirements of the loan and costs that you’d incur in the process of acquiring the mortgage. Receiving this counseling is one of the requirements of obtaining a reverse mortgage and it might cost you around $120 – $125. However, not being able to pay this sum does not exempt you from the eligibility of receiving the loan. You can still have a reverse mortgage, but for that, you’d need to find a counselor that either reduces the fee or waives it.
A reverse mortgage can be the surplus income that you are thinking of having and besides this, it has many other merits. By now, you might have got the answers to the questions: What is a reverse mortgage and how does it work? Still, before you go for it, make sure that you understand its bits to stay on the safe side.