Thursday, August 18, 2016, PM | 1 Comment
If you’ve heard of reverse mortgages, the chances are good that’s it’s been in a negative context.
First, there are the commercials with celebrity spokespeople that are a popular target for ridicule.
Then, there’s the controversy over the loans themselves. Doable Finance covered some of that back in 2010.
In 2015, the Consumer Financial Protection Bureau released a report about the top complaints about this product.
Reverse mortgages aren’t perfect, but they can be very helpful to seniors under the right circumstances.
In the rest of this post, I’ll explain why and answer a few common questions.
A reverse mortgage is a loan for homeowners who are at least 62 years old. The most popular variety, the Home Equity Conversion Mortgage (HECM) is insured by the Federal Housing Administration (FHA), a United States government agency.
These loans are designed to help seniors who have accumulated significant home equity convert it into money while remaining in their homes.
The money can be used to pay off a conventional mortgage and eliminate monthly payments, supplement retirement income, or provide a line of credit to be used at a later time.
Here are a few common questions about reverse mortgages along with their answers:
Question: If we get one, do we will own our home?
Answer: Yes, you will still have title to your home. The home will belong to you and then subsequently to your estate.
Q: What if someone is currently on title to our home that is under the age of 62?
A: You can probably remove them from title and qualify for a reverse mortgage. This is commonly done with children that have been placed on title to qualify for a regular home loan or for other reasons.
Q: Can I get a reverse mortgage if I have bad credit?
A: This used to be an easy question to answer – it largely did not matter. However, beginning in 2015 the FHA imposed income and credit requirements for HECM loans.
This was done to guarantee that the homeowner can afford to pay property taxes and homeowner’s insurance, which has always been a requirement of the program. The answer to this question is now, “it depends.”
Q: What if I already have a mortgage?
A: If you currently have a mortgage, you can use the reverse mortgage to pay off the existing loan.
If you do not have enough equity to do so, you can pay the rest of the mortgage at closing. It may also be possible that you don’t have enough equity to qualify for a reverse mortgage.
Q: How much am I eligible to receive?
A: It depends on the age of the youngest borrower in the home, the amount of equity, and prevailing interest rates. There are a few quality reverse mortgage calculators available online, including this tool that doesn’t require personal information. The reversemortgagealert.org is no longer non profit. We advise that the site is now commercially operated to sell mortgage leads to AAG.
Q: Do I have to make any payments?
A: You do not have to make any payments on your reverse mortgage, although you do have the option to do so and reduce the interest eating up your home equity.
You must, however, continue to pay your property taxes and maintain homeowners insurance.
Q: When is a reverse mortgage due?
A: The loan becomes due when the home is no longer used as a primary residence. In more practical terms, this occurs when the borrowers can no longer occupy the home for a period of twelve months or all borrowers have passed away.
The heirs have the option of selling, refinancing or paying off the reverse mortgage.
Generally, the lender will work with the estate to assist with an orderly liquidation. In most cases, the lender will not begin foreclosure for at least 6 months after calling the mortgage due.
Q: What if my home is worth less than I owe when we no longer occupy the home?
A: HECM loans are non-recourse. If you owe more than the home is worth, the bank takes the loss with no affect to your estate. This is part of the insurance that the FHA provides.
Q: How do I receive funds?
A: There are three options:
Lump sum disbursed at closing.
Line of credit that you can draw on about 30 days after closing. The unused portion of the line of credit increases over time, and no interest accrues on the unused portion of the line.
A monthly payment until the last borrower can no longer occupy the home for 12 months, even if there is still no equity in the home.
You can also elect to combine a credit line and monthly payment.
Hopefully this helps clarify how a reverse mortgage works. Yes, the commercials can be a little cheesy, but this is a legitimate financial tool designed to serve a real need.
Although the product is not right for all seniors, in the right circumstances it can be very helpful.
John Krystof is a long-time veteran of the mortgage industry. He now focuses much of his attention on helping seniors afford a better, more secure retirement.