Simply put, it’s like any other mortgage except that the bank pays you instead of you paying the bank. The most common reverse mortgage is the FHA insured Home Equity Conversion Mortgage, HECM. There are also new types of reverse mortgages coming out from independent lenders allowing borrowers access the equity from higher valued homes up to $10,000,000.00.
As with a traditional “Forward” mortgages the proceeds from a home sale go to the homeowner less any interest, principal or closing fees due on the loan. If the homeowner is still living, they get to keep all of the proceeds from the sale. If the estate sells the home after the homeowner has died, the estate can sell the home on the open market for market value.
A reverse mortgage is a kind of mortgage in which the borrower does not have to make loan payments until they permanently move out of the home although a borrower CAN pay monthly payments if they choose to.
They allow eligible homeowners to take equity from their homes without the required monthly repayments on traditional mortgages. A qualified homeowner can access a large amount of nontaxable equity via a lump payment, regular payments, a line of credit or a combination of all three. The interest accrues on the loan until the loan becomes due and payable.
The loan becomes due and payable upon the borrower’s death, permanent relocation, or the sale of the home. Unlike a forward mortgage, where the lender can take legal action to recover shortages should the home be sold for less than what’s owed, a reverse mortgage is insured by FHA, It doesn’t matter If the value of the house decreases or, the loan exceeds the value of the home. The mortgage insurance provided by the program will ensure that neither the borrower nor the borrower’s estate has to pay any shortages. In essence the lender will be insured if the home value is less than what is owed on the property, and they will be paid in from of the mortgage Insurance fund.
This is referred to as a nonrecourse loan and this in itself is a major advantage reverse mortgage have over forward mortgages.
The homeowner may choose from several different options on how to accept these payments.
A reverse mortgage can be used by any qualifying borrower for anything they want.
Purchase a new home. Since no payments are required, a significant amount of equity can be left in investments for retirement income, or a reverse mortgage can help buy a larger home without the worry of big mortgage payments.
Type of Property
Reverse mortgages are available for single‐family homes, condos, and townhouses. In Florida, condominium projects will have to be approved with FHA before application.
Applicants must be 62 or older with 55 being the youngest age of some portfolio programs.
HUD‐approved counseling is required by HUD for reverse mortgage applicants. The purpose of the counseling is to insure that candidates for reverse mortgages understand their options. It should be a confirmation of everything your loan officer has already disclosed and explained to you. If not, this counseling session will help you examine the advantages and drawbacks of a reverse mortgage in light of your financial and personal circumstances. It also explains how a reverse mortgage may influence Medicaid and SSI eligibility. A financial counselor should also discuss your many choices for how you receive the money.
Insurance & Safeguarding
Like any other mortgage, you must pay taxes and insurance on time, maintain the house, and pay homeowners’ association dues. You must maintain the property as your primary home. It should also be noted that escrow funds are not the norm with reverse mortgages. It is imperative that a borrower knows they need to plan for payment of their real estate taxes and homeowners’ insurance. The only time an escrow account is set up is with what is called a LESA (Life Expectancy Set Aside). This may be required if a borrower has a history of delinquencies on real estate taxes, homeowners Insurance or other debt obligations. The LESA ensures that once the reverse mortgage is setup, all real estate taxes and homeowners Insurance are paid on time.
Unlike forward mortgages, reverse mortgage eligibility calculates qualifications differently. Lenders use a financial assessment of the borrower which can make qualifying for the reverse mortgage easier.
While there are no credit scores required, lenders will still review credit history to determine whether the borrower is having financial difficulties.
Also, instead of looking at conforming guidelines where debt to income ratios are used to qualify, the reverse mortgage income assessment calculation is based on monthly cash flow. Income can come from a multitude of resources which include traditional income from pensions, social security, and employment. Income can also be drawn from investment portfolios or non- borrowing home occupants. The cash flow analysis includes an assessment of the homeowner’s liabilities and outgoing payments each month. Liabilities include obligations such as loan payments and credit card payments.
A calculation is conducted where monthly expenses are subtracted from income. The difference (funds left over) is called residual income. Residual income required in Florida 2023 is $529.00 a month on a single-family home.
What are the costs to close and how are they paid?
As with forward mortgage refinances, closing costs can be subtracted from the loan proceeds. Closing costs typically include the origination charge, upfront mortgage insurance premium, and other traditional closing expenses, like title fees, documentation stamps and intangible taxes. As well as monthly Mortgage Insurance Premiums (MIPs) , loan service fees (if applicable), and loan interest.
How Much Can You Borrow?
The maximum amount you may borrow with a HECM is based on your age, and the lesser of your home’s appraised value or the FHA’s maximum claim amount, which is $1,089,300 as of January 1, 2023.
Some lender portfolio programs offer plans allowing for home values up to $10,000,000.00.
Unlike forward mortgages, you can’t apply for a specific loan amount. Instead, the amount you qualify for is based on the borrowers age, the value of the property and current interest rates.
A total amount is approved and if a borrower does not want all the money, the balance of funds is left on a line of credit for future access.
A reverse mortgage’s payout to the borrower is established by the lender per the borrower’s request.
For more information or to get specific personal information for a reverse mortgage please feel free to give us a call.