Reverse Mortgages
A Reverse Mortgage is a great way to keep up with the increased cost of living in your retirement years. Why struggle when you don't have to? You've worked so hard all these years to create the equity in your home, now let the equity work for you.
If you’re 62 or older – and looking for money to supplement your retirement income, finance a home improvement, pay off your current mortgage, or pay for healthcare expenses – you may be considering a reverse mortgage. It’s a safe, government sponsored or FHA (Federal Housing Authority) loan product that allows you to convert part of the equity in your home into tax-free cash without having to sell your home or pay additional monthly payments.
The Federal Trade Commission (FTC), the nation’s consumer protection agency, wants you to understand how reverse mortgages work and the types of reverse mortgages available.
In a “regular” forward mortgage, you make monthly payments to the lender and the balance decreases. In a “reverse” mortgage, you receive money from the lender, but you don’t have to make payments for as long as you live in your home. The loan is repaid when you die, sell your home, or when your home is no longer your primary residence. Currently, the proceeds of a reverse mortgage generally are tax-free and there are no income or credit restrictions.
How Does a Reverse Mortgage Work?
A reverse mortgage is a loan for senior homeowners that utilizes the home’s equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. Any remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage.
Eligibility For a Reverse Mortgage
To be eligible for a HECM reverse mortgage, the Federal Housing Administration (FHA) requires that at least 1 homeowner be at least age 62. The home must be owned free and clear or if there is an existing mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at closing. Also financial assessment is now becoming a reality. The purpose is to evaluate a borrower’s willingness and capacity in order to make sure they are able to continue paying their property taxes and insurance and other regular bills on time. Willingness- Credit, mortgage and debt payments needs to be on time in the last 12 months. No more than 2, 30 day lates in the last 24 months with no major derog-atory credit. Capacity- Underwriters will do a cash flow analysis of all effective income minus all expenses to determine capacity. Once the results of the financial assessments are determined, the amount and structure of the life expectancy set- aside is calculated.
Outliving the Reverse Mortgage
Generally speaking, a reverse mortgage loan cannot be outlived and will not become due, as long as at least one homeowner lives in the home as their primary residence, continues to pay required property taxes and homeowners insurance plus maintains the home in accordance with FHA requirements.
Estate Inheritance
In the event that the home ceases to be the primary residence for more than 12 months or in the event of death, the homeowner’s estate can choose to refinance to pay off the reverse mortgage loan or put the home up for sale.
If the equity in the home is higher than the balance of the loan when the home is sold to repay the loan, the remaining equity belongs to the estate.
If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA. No other assets are affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage.
Loan Limits
Currently the amount that is available generally depends on several factors: age (older is better), appraised value of the home, current interest rate, and FHA or government imposed lending limits.
Distribution of Money From a Reverse Mortgage
There are several ways to receive the proceeds from a reverse mortgage:
Lump sum – a lump sum of cash at closing.
Tenure – equal monthly payments as long as the homeowner lives in the home.
Term – equal monthly payments for a fixed number of years.
Line of Credit – draw any amount at any time until the line of credit is exhausted.
Any combination of those listed above.
Call us to calculate Your Eligibility
