Do you ever wonder, “What Is A Reverse Mortgage?” We’ve all seen the TV ads telling us all about how a reverse mortgage can be the answer to your cash flow problems and provide you with the money you need to enjoy retirement. However, the details are not laid out in the TV ads, so here I’m going to go into the details.
What Is A Reverse Mortgage? A reverse mortgage is a loan secured against either a portion of or the entire positive equity in your home. The money may be paid in a lump sum, as monthly payments, laid out as a line of credit, or a combination of the three. There are no monthly mortgage payments for the homeowner to make, but interest on the loan is added to the principal every month.
What Is A Reverse Mortgage? The Details
In the US, what is commonly referred to as a reverse mortgage is actually called a Home Equity Conversion Mortgage? The Federal Housing Administration insures this type of mortgage, and the FHA is also the entity responsible for oversight of the mortgages and those that sell them.
A reverse mortgage works like this:
- A homeowner who is retired or approaching retirement decides they would like to apply for a reverse mortgage.
- The homeowner must then take an approved credit counseling course.
- The homeowners apply for a reverse mortgage.
- As long as they meet the eligibility requirements (see below), they are approved.
- The homeowner chooses whether to take the mortgage as a lump sum, a monthly income, a line of credit, or a combination of the three.
- No repayments are required while the homeowner lives in the home.
- When the homeowner dies, the home is sold, and the reverse mortgage is paid back.
What Are The Eligibility Requirements Of A Reverse Mortgage?
Once a homeowner has completed an approved credit counseling course, they may apply for a reverse mortgage as long as they meet the following criteria:
- Reverse mortgages are purely for homeowners who have reached or are soon to reach the legal retirement age in the United States. The minimum age for a reverse mortgage applicant is 62 years. In the case of a joint homeowners or a homeowner who has a spouse, if the mortgage applicant dies before their spouse, that spouse is allowed to remain in the home for as long as they like as long as they continue to pay property taxes and homeowners insure, as well as maintaining the home to a reasonable standard.
- The home against which the mortgage is secured must be the applicant’s primary residence. A reverse mortgage cannot be approved on a secondary residence, a holiday home, or any other properties the applicant may own.
- Any existing mortgage balance must be small enough to be paid off by the reverse mortgage. For example, if you still owe $75,000 on your mortgage and qualify for a $150,000 reverse mortgage, you can be approved, as long as you pay off the outstanding $75,000. However, if you have an outstanding balance of $150,000 and qualify for a reverse mortgage of $100,000, you will not be approved.
- The home must be a standard 1 to 4 family dwelling of a type approved by the FHA. This covers almost every kind of single to four-unit family home. You can also apply for a reverse mortgage if you have an FHA approved condo or manufactured home.
- Applicants must pass a financial assessment where they must be able to demonstrate they have a predefined level of residual income, after living expenses. They must also have a satisfactory credit history.
How Much Does A Reverse Mortgage Cost?
Recipients of a reverse mortgage do not have to make monthly repayments. Instead, interest is added to the principal each month, and the total amount is payable upon the death of the homeowner – or their spouse, whoever lives longer.
One-off fees include:
- Counseling Fees: These can range from entirely free to approximately $150.
- Origination Fees: This is paid to the mortgage provider to cover the costs of setting up the loan. Again, some providers may not charge a fee at all. However, others charge up to $6,000.
- Initial Mortgage Insurance Premium: This payment is made to the FHA at closing. This insurance covers both the borrower and the FHA in the event that the home is sold for less than the amount of the loan. For example, if you have a reverse mortgage of $200,000 and your home only sells for $175,000, the FHA pays the difference to the lender. This protects the borrower, and upon their death, their surviving family from having to pay the difference to the lender. The actual cost of the IMIP is 2% of the loan amount, then an annual fee of .5% of the outstanding balance.
- Closing Costs: Again, the exact amount varies from home to home, but this will be the cost of items such as a home inspection, an appraisal, credit checks, etc. The lender can provide an estimate of these costs before the applicant goes ahead.
Ongoing fees are:
- The annual mortgage insurance premium – 0.5% of the outstanding balance. Borrowers do not necessarily have to pay this fee each year. Many lenders allow this fee to be rolled into the total amount owed to be covered when the home is sold.
- Servicing Fees: Not all lenders charge service fees. For those that do the average is around $30 per month. However, as with the annual mortgage insurance premium, these payments can be rolled into the amount owed.
What Are The Advantages Of A Reverse Mortgage?
A reverse mortgage can enable a homeowner to access the positive equity they have built up over many years, and it is classed as a loan advance, so the homeowner is not required to pay tax on either monthly payments or a lump sum payment.
Also, if the homeowner is receiving social security or Medicare benefit the money from a reverse mortgage still does not count as income, so it will not affect their benefit payments.
Can You Lose Your House With A Reverse Mortgage?
Yes, there are some circumstances under which the lender can foreclose on a reverse mortgage.
- If you stop living in your home for more than 12 months, it is no longer considered your primary residence.
- You stop paying your property taxes, homeowners insurance, or homeowner association fees. In the case of homeowners insurance, this is distinct from the mortgage insurance that is paid to the FHA.
- If the home is not maintained to the FHA’s habitability standards, then the lender can foreclose on the property.
What Happens To A Reverse Mortgage When You Die?
If the homeowner has a spouse, then the spouse can stay in the home under the same terms of the reverse mortgage and payment will become due when that spouse either dies, leaves the home, or sells the property.
If the mortgage holder does not have a partner living in the home with them, then upon their death, one of three things can happen:
- The home is sold, the loan is repaid in full, and any remaining funds are distributed to the homeowner’s estate.
- If the home is sold for less than the outstanding loan balance the lender receives all of the proceeds and the FHA pays the difference to the lender. The homeowner’s estate is not responsible for the discrepancy.
- The homeowners family can obtain a regular mortgage or loan with which to pay off the balance of the reverse mortgage and then keep the home.
Can You Sell A House Which Has A Reverse Mortgage?
Yes, you can sell a house which has a reverse mortgage, as long as the purchase price of the home covers the outstanding balance.
A reverse mortgage is a useful way for retirees to take advantage of the equity they have built up in their homes. There are no monthly mortgage repayments for the homeowner to make, and the majority of lenders allow the setup and on-going costs of the mortgage to be rolled into the outstanding balance.
A surviving spouse cannot be asked to vacate the home after the homeowner dies unless they fail to maintain the home, leave the home for e12 months, or stop paying property taxes. These circumstances are also grounds for a lender to foreclose if the mortgage holder is still alive and contradicts one of these mortgage terms.
Great Information From Other Real Estate Experts
Why You Should Never Get A 15 Year Mortgage – Geoff Southworth
How Reverse Mortgages Work – Eric Jeanette
Pros and Cons of a Reverse Mortgage – Bill Gassett
Common Questions of a Reverse Mortgage – Luke Skar
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.