Many people are asking the question what is a reverse mortgage? Chances are you’ve heard the term “reverse mortgage.” So what exactly is a reverse mortgage loan and how does it work? The reverse mortgage loan is actually a type of loan that is very beneficial in certain circumstances. A reverse mortgage is intended for senior citizens of the age of 62 or older. The loan allows senior home owners to take advantage of equity in their home and take out cash retirement, medical expenses or anything else you might want to use the money for.
Even though the reverse mortgage loan option has been around for quite sometime we still get the question almost daily of “What is a reverse mortgage?” The first loan was actually done in Main back in 1961. However it wasn’t until 1988 when the Federal Housing Authority Insurance Program was signed into law. This law set the way for the loan designed specifically for seniors called the reverse mortgage pilot program. At the time 50 lenders nationwide were chosen to participate and test the waters for the new program. In 1989 the first reverse mortgage was given. The popularity for the loan grew and became a success for many senior home owners. Since the time of its inception many seniors have taken advantage of this federally insured program and have used the equity in there homes to help out with retirement.
Different Types of Reverse Mortgages
There are three main types of reverse mortgages, and it is important to know all of them in order to make an educated decision about the type of loan you’ll need and benefit most from.
- Home Equity Conversion Mortgage (HECM): This type is backed (insured) by the Department of Housing and Urban Development (HUD), and the money from this mortgage can be used towards any purpose (vacations, paying off bills, buying as many burritos as you want, etc.). Most borrowers qualify for this option.
- Proprietary Reverse Mortgage: In contrast to HECMs, these loans are backed by private companies, not the government. These loans are beneficial because they generally afford the borrower larger funds than the other options so long as the borrower’s home has a high appraisal value and a low mortgage. Because this option is backed by private companies, the requirements may vary quite a bit from lender to lender.
- Single-Purpose Reverse Mortgages: This option is meant to give borrowers funds from their own house for just one purpose – which the lender decides. These loans are sometimes offered through state or federal government agencies or even non-profits, but they are rarer than the two options above. The biggest perks that come with these loans is that they are the least expensive of the three options and most borrowers qualify.
How The Reverse Mortgage Works
In ordinary mortgage loans, you make regular payments to the lender until the home loan is paid off. But with a reverse mortgage, the process works in . . . well, reverse. Instead, you borrow against the equity in your own home, so the lender actually pays you instead. This works similarly to a cash-out loan in the way that the money you get out of your home goes straight into your pocket to be used for other expenses. In most cases, that money is tax free. You don’t have to pay back the reverse mortgage loan while you still live in the same house. Once you move out, however, the reverse mortgage must be repaid, and this is usually done through selling the home.
Who Qualifies for a Reverse Mortgage?
Reverse mortgages are intended for “seniors,” but that age fluctuates depending on who you talk to. So what is the minimum age for a reverse mortgage? Borrowers must be at least 62 in order to qualify, according to the Federal Housing Administration (FHA). This is a major requirement, and the FHA doesn’t allow any exceptions to this rule even if the borrower is permanently disabled. But that isn’t the only required qualification. Borrowers must also meet the following criteria in order to qualify.
What Are the Requirements for a Reverse Mortgage?
- Previous home loan must be completely paid off OR all liens must be covered or satisfied upon receiving funds from the reverse mortgage.
- Sufficient equity. If there is not enough equity in the home to cover the remaining loan amount, then the reverse mortgage will be denied due to the shortfall.
- The home must be the borrower’s primary residence.
- The borrower must provide proof that they can pay for additional house expenses, such as maintenance, insurance, and taxes.
- The home must meet FHA standards, but most homes qualify, including single family homes, manufactured homes, homes with 2 to 4 units, and some condominiums. Depending on the lender, a home inspection may be required to ensure the home is in good, working condition.
- Prior to getting a reverse mortgage, the FHA requires that borrowers participate in an approved counseling session given by an HCEM counselor. This session is meant to educate the borrower on all the benefits and costs of the reverse mortgage and answer any questions about what is a reverse mortgage loan.
Reverse Mortgage Interest rates
Reverse mortgages do still have interest rates, so the loan is not just free money. Like with other mortgage loans, it is best to shop around to find the lender offering the best rates and plans. Depending on the rate plan you choose, you may be limited in how funds are distributed. For example, a fixed rate will only allow you to receive funds in a lump sum.
Loan Limits and Distribution
A lender will limit how much you can borrow based on several factors: age, type of reverse mortgage, home’s appraised value, borrower’s ability to pay taxes and insurance, and current interest rates. To determine how much you can borrow before talking to a lender, try using a reverse mortgage calculator.
As far as distributing funds goes, you have several options for how much money to get and when:
- Line of Credit – you can take out as much money as you need however often until you’ve used up all of your credit.
- Term – you get paid an equal monthly amount for a set number of years.
- Lump Sum – all of the credit available to you is paid at closing.
- Tenure – you get paid an equal monthly amount until you no longer live in the home.
- Or you may choose a combination of the options above.
Is a Reverse Mortgage Right for You?
There are many benefits to the reverse mortgage home loan. For many senior home owners it is the solution they have been looking for. So if you have more questions on how does a reverse mortgage work and would like a FREE consultation call us now at (855) 667-9290. We are more than happy to answer any questions you might have.