Everything You Need to Know About Reverse MortgagesMarch 12, 2022 by X2 Mortgage
Reverse mortgages are becoming more common these days because they offer homeowners a way to tap into their home equity without selling or qualifying for a cash-out refinance. If you’re thinking about taking advantage of this option, then it is important to acquire adequate information about how reverse mortgages work.
There’s multiple ways a reverse mortgage can be done and it’s important to fully understand how they work prior to jumping in head first. Plus, the amount of money that can be received from a reverse mortgage depends on numerous factors such as value, equity, age of borrower, etc.
Reverse mortgages are a great option for seniors who want to stay in their homes longer. Read on to discover more about them.
What is a Reverse Mortgage?
A reverse mortgage is an advanced type of home loan that lets homeowners over 62 years old draw on their home equity. It differs from traditional home loans because it doesn’t require borrowers to pay back any money until the loan is refinanced - or the home is sold.
It is referred to as a "reverse mortgage" because you receive payments from your lender rather than making monthly loan payments to them. Also, the amount you owe on the loan increases at a specified rate in addition to any payments that your lender makes to you. You can receive a reverse loan in a lump sum, monthly, quarterly, yearly, or as a line of credit.
There are Three Main Types of Reverse Mortgages:
1. HECM Loans
The HECM is the most common type of reverse mortgage. The FHA-insured loan is a government-backed loan that allows homeowners age 62 or older to borrow up to the maximum allowed under the regulations (up to $970,800 in 2022). There are no restrictions on how the borrower can use the funds.
2. Proprietary Reverse Mortgages
A proprietary reverse mortgage, also known as a Jumbo reverse mortgage, is a loan provided by private reverse mortgage lenders. Because they are not federally insured, borrowers are not required to pay a monthly insurance premium or seek financial counseling. Jumbo reverse loans can also exceed the FHA's HECM loan limits.
3. Single-Purpose Reverse Mortgages
This is the most affordable type of reverse mortgage available to low and middle-income homeowners. They are provided by state and local governments and nonprofit lenders. Payments from these reverse mortgages can only be used for a specific, lender-approved purpose, such as home repairs, improvements, or paying property taxes. They’re typically much harder to obtain.
What Can You Use A Reverse Mortgage For?
A reverse mortgage can be a useful financial tool for senior homeowners seeking additional income during their retirement years. You can use a reverse mortgage for a variety of purposes.
To supplement Social Security or other retirement income.
To pay medical expenses.
To cover the cost of in-home care.
Remodeling or repairing your current home.
Building a college fund for children/grandchildren.
Helping you cover living costs during times of emergency.
Covering property taxes and other essential living expenses.
To pay for travel and vacations.
How Does a Reverse Mortgage Work?
A reverse mortgage is similar to a traditional home equity loan or line of credit in that you borrow against a portion of your home equity. However, it differs from traditional loans in that you keep the money and keep your home without making a single monthly payment for the rest of your life.
The majority of reverse mortgages are completed in 20-45 days. Borrowers can receive 50%-60% of their equity value, depending on various factors. Once the loan is approved, borrowers have four disbursement options: a single lump sum, fixed payments for a set term (or as long as you live in the home), credit line, or a combination of these options.
Reverse mortgage borrowers are generally not required to repay the reverse mortgage as long as they live in the home. Payment is only due when the homeowner does one of the following:
Decides to sell their home.
Moves out of the house for more than a year.
Goes delinquent on property taxes, insurance, or HOA.
Refinances into a traditional or additional mortgage.
When a reverse mortgage borrower passes away, the lender will talk to the heirs about loan payment options and inform them of the current mortgage balance. The heirs will have a set timeframe to decide what to do with the loan and the property.
The loan can be repaid by selling the house. But if the heirs want to keep the house, the mortgage loan will have to be paid off in some other way, such as a traditional refinance.
Reverse Mortgage Eligibility and Requirements
You must meet these requirements to qualify for a reverse mortgage:
You and your spouse (if applicable) must be at least 62 years old, own your home, and reside in it as your primary residence.
Eligible properties include:
2-4 unit owner-occupied properties
The equity in your home should be sufficient to cover the reverse mortgage amount you require. The required equity may vary depending on the lender, but it is almost always at or greater than 50 percent.
There can be no liens on the existing mortgage.
You must be able to pay your property taxes and homeowners' insurance premiums.
You must maintain the property in good condition.
You and any heirs must be ready to repay the loan at the current interest rate if the house is sold, the homeowner is no longer a resident, or the homeowner dies.
In the case of a HECM, you must attend financial counseling with a HUD-approved counseling agency to demonstrate to the government that you at least theoretically understand the obligations you're entering into.
Lenders may consider other factors, such as your income, credit score, and debt-to-income ratio (DTI), similar to a traditional mortgage. However, these factors are not usually required.
Reverse mortgages are not available through the Veterans Administration. But you can use a VA loan to pay off a reverse mortgage.
How Much Money Can You Get From a Reverse Mortgage?
You can get up to $970,800 from an FHA-insured reverse mortgage. The amount depends on several factors including your age, income, current interest rates, appraised home value, and the amount of equity you have in the home.
However, there are some limitations on the amount you can receive. For instance, you must live in your home for at least one year after receiving the money.
When applying for a reverse mortgage, lenders will ask you questions about your current situation and finances. These may include:
Your age and marital status.
Your annual household income.
Whether you have any outstanding debts.
What your monthly housing cost is.
How much equity you currently have in your home.
If you plan to sell your home within five years.
How long you've lived in your home.
Any major life changes that may affect your financial situation.
How Much Does a Reverse Mortgage Cost?
Like any other mortgage, a reverse mortgage has costs and fees associated with it. These fees are divided into two categories: One-time costs and Ongoing costs.
One-time Upfront Costs
These are fees paid at the start of the reverse mortgage loan. They are as follows:
Counseling Fees: You must first seek counseling from a HUD-approved reverse mortgage counselor before applying for a HECM reverse mortgage loan. Counseling agencies charge a fee for their services, typically around $125.
Origination Fee: This is the cost of a lender's operating expenses related to the origination of your reverse mortgage. Fees differ by lender and are capped by the FHA. Generally most lenders will be charging about 1% - 4% of the loan amount depending on the size.
Appraisal Fees: An appraisal assigns a value to your home, which is a key factor in determining your loan amount. Appraisal fees vary depending on region, home type, and value, but they average about $550.
Closing Costs: Also referred to as "third-party fees." They include title searches, surveys, inspections, recording fees, mortgage taxes, credit checks, and other fees.
First Mortgage Insurance Premium: The initial premium is limited to 2% of the home's value. So you pay $2,000 for every $100,000 in appraised value. This insurance premium is different from your homeowners' insurance. Your lender's initial and annual mortgage insurance premiums are charged and paid to the Federal Housing Administration.
Generally, the one-time upfront costs can be paid in cash or rolled into your reverse mortgage loan amount to reduce your out-of-pocket expenses.
These are fees added to your loan balance each month. Ongoing costs may include the following:
Interest: Your interest rate is calculated as a percentage of the loan amount. If you take a lump-sum payment and a fixed rate product, you get a fixed interest rate. If you choose a term payment or line of credit, the interest rate will fluctuate.
Service Fees: This is rare but when applicable they are paid to your lender to cover costs such as sending you account statements, distributing loan proceeds, and ensuring that you meet loan requirements.
Annual Mortgage Insurance: You must pay an annual mortgage insurance premium of 0.5 percent of the outstanding mortgage balance.
Property Charges: These include homeowners' insurance and property taxes and, if applicable, flood insurance and HOA.
The higher your loan balance and the length of time you keep it, the higher your ongoing costs. The best way to keep your ongoing costs low is to borrow only what you need.
How to Get a Reverse Mortgage
You're in the right place! Getting started with Reverse Mortgage is simpler than you think.
1. Find a Lender: There are many reverse mortgage lenders to choose from. Shop around and compare the costs of the various lenders - or let us do the work for you! X2 Mortgage instantly shops your scenario to various lenders to see who is priced best for your specific situation. Plus, those lenders then give us wholesale rates where we can pass the savings on to you.
2. Get Your Reverse Mortgage Certificate of Counseling: You won't be able to start the loan until you've submitted a signed HECM Counseling Certificate. Here’s a couple of providers where this can be done-
CONSOLIDATED CREDIT (800) 435-2261
CREDIT.ORG (800) 947-3752
GREENPATH FINANCIAL WELLNESS (888) 860-4167
NAVICORE SOLUTIONS (866) 855-7736
3. Application and Documentation: Complete a loan application and provide a few supporting documents.
4. Property Appraisal: Once you’ve completed your application, your lender will order an appraiser to determine the market value of your home. The appraisal is also done to make sure the house is structurally sound and meets all safety and building codes in the area.
5. Loan Acceptance and Closing: Once all the paperwork has been completed, your loan is submitted to the underwriter for review and approval. Once your loan has been approved, your loan documents will be sent to your solicitor, who will need to provide you with independent legal advice before inviting you to sign the closing documents.
6. Settlement: There is a 3-day right of rescission period after the closing, during which you can choose to cancel your application without penalty. The title company will release funds to you, and your loan will be recorded with your county. The documents can be signed and returned for settlement if you choose to proceed.
Who Owns The House in a Reverse Mortgage?
As with any other mortgage, the homeowner holds the title, while the lender holds the lien. Although a borrower is required to repay the loan when they move out or sell their home, he or she is expected to keep any remaining equity after the loan is paid off. In a HECM mortgage, if the loan is greater than the home's value, HUD will make up any shortfall to satisfy the lender.
Essentially, the borrower owns the home at all times, and any equity in the property belongs to you or your heirs.
What Happens When The Reverse Mortgage Needs to be Repaid?
The most common method of repaying a reverse mortgage is selling the home, where proceeds from the sale are then used to repay the loan in full. Other options include refinancing, providing a deed in lieu of foreclosure, taking out a new mortgage, or using personal funds. The repayment option you choose depends on your specific circumstances.
Sell The House
If you don't want to keep the house, and there is still equity in the property.
If the value of the home is less than the reverse mortgage. The Federal Housing Administration (FHA), which backs HECMs, considers the loan terms met if the borrower or heirs sell the home for 95% of its appraised value.
Refinance or Use Personal Funds
If you want to keep the home, have enough equity, and enough income to make mortgage payments, then a traditional mortgage refinance is your best option.
Simply use savings to pay off the remaining balance of the reverse mortgage.
Provide a Deed in Lieu of Foreclosure
If the value of your home has fallen significantly and is now far less than the reverse mortgage. A deed in lieu of foreclosure is a process that involves handing over ownership of the home to the lender to avoid foreclosure proceedings.
If the property's value is insufficient to repay the entire loan when the borrower dies, the heirs can never be forced to pay any additional money because the lender has no other recourse for loan repayment. This is referred to as Non-Recourse Protection.
In other words, the lender or HUD can only use the sale of the property to repay the loan, and they can never attach the borrower's other assets or ask the heirs to repay any shortfall.
Is a Reverse Mortgage Right for You?
To know if a reverse mortgage is right for you, you should seek personalized advice from a mortgage loan originator. You should equally examine your specific situation.
Here are a few conditions when a reverse mortgage is a good idea:
If you've depleted most of your savings and have significant equity in your primary residence.
If you anticipate significant costs after retirement.
If you’d like to never make another mortgage payment ever again.
If you can pay the taxes, insurance, and other obligations associated with a reverse mortgage.
Benefits of a Reverse Mortgage
You can receive the money in various ways, including a lump sum payment, a fixed monthly payment, a line of credit, or a combination of the three.
You or your heirs are not required to make any loan payments until you move out, sell the house, or die. And if you choose to make repayments at any time, there is no penalty.
Because HECMs are non-recourse loans, you will only owe the amount borrowed, even if the value of your home decreases.
Unlike 401(k) and IRA retirement income, money obtained through a reverse mortgage is not considered income by the IRS and is thus not taxable.
If one spouse passes away, the surviving spouse will stay in the house if they are a co-borrower.
Risks Associated With a Reverse Mortgage
While there are many advantages to using a reverse mortgage, there are some drawbacks too. Here are some of the things you should consider before signing a contract.
Interest rates on reverse mortgages are typically adjustable unless specified. Fix rate reverse mortgages do have higher interest rates than adjustable.
Reverse mortgages can come with high fees and closing costs if you work with the wrong lender.
Failure to pay your monthly home fees may result in the loss of your home.
If the interest and other costs exceed the home’s market value, the mortgage may become unaffordable.
How to Avoid Reverse Mortgage Scams
With the recent rise in popularity of reverse mortgages, fraudsters now have more opportunities to prey on unsuspecting senior citizens under the guise of offering reverse mortgage loans and defrauding them of the proceeds. While fraudsters employ a variety of strategies, the following tips will help you avoid reverse mortgage scams:
Before taking out a reverse mortgage loan, consult with an independent financial adviser or a HUD-approved independent reverse mortgage counselor.
Don't respond to unsolicited reverse mortgage emails or phone calls. Instead of responding to a lender who approaches you, conduct your research and approach a lender.
Check to see if the reverse mortgage you're signing up for is federally insured. This will safeguard you when the loan is due.
Before signing any loan documents, read the content thoroughly and ask questions.
Make certain that any reverse mortgage payments are made directly to you; do not let anyone persuade you to sign over the funds to someone else.
Avoid anyone who tries to pressure you into making a decision you're not sure about, such as investing your reverse mortgage payments in an annuity, insurance policy, or other investment product, or pressuring you to take a lump-sum payment rather than monthly payments.
Reverse mortgages are a great way to help seniors stay in their homes longer. They allow homeowners to tap into their home equity without selling or moving. However, before taking advantage of this opportunity, it is important to understand how it works and limit potential risks. If you go this route, you should read the fine print and get advice from a trusted mortgage advisor.