Basic Features of a Reverse Mortgage
A reverse equity mortgage can be an attractive option for some seniors, but this type of loan does come with a specific set of requirements and regulations. Any consumer considering using a reverse mortgage to unlock the equity in his or her home should carefully examine the terms of the mortgage before committing.
• Reverse mortgage applicants must be at least 62 years old and own their home in order to obtain a reverse mortgage. Homeowners with an existing mortgage may still qualify for a reverse mortgage, if certain conditions are met. The reverse home mortgage must be the first lien on the property, so any existing liens on the property, including mortgages, must be repaid in full before the reverse mortgage can be approved. (Reverse mortgage funds can be used to repay the existing mortgage balance).
• Prior to applying for a reverse home mortgage, all candidates must obtain third-party financial counseling from a Department of Housing and Urban Development-approved counseling agency. A counseling session is required for all reverse mortgage candidates. Counseling can be conducted over the telephone or during an in-person session.
• The mortgage holder is responsible for expenses like property tax and homeowner’s insurance, and for keeping the property well maintained. For some customers who struggle to pay property taxes or insurance, a mortgage can be created that sets money aside to pay for these expenses.
• Loan fees are standard for reverse mortgages, as with any mortgage product. These fees can either be financed by the borrower directly or paid using funds from the reverse mortgage. This makes reverse mortgages very affordable, leaving very little out-of-pocket expense for the reverse mortgage holder.
• Payments are deferred for as long as the home is the borrower’s primary residence. Payment deferment ends when the last surviving member of the household permanently leaves the home (when the last borrower dies, moves out of the property for 12 consecutive months, or the property is sold). When this happens, the heirs or estate-holders must pay back the loan in order to retain ownership of the home. To do this, the heirs can pay back the loan with private funds, refinance the property, or sell the home in order to pay off the reverse mortgage.
• Reverse mortgages are “non-recourse” loans. This means that the mortgage holders will never owe more than the value of the home, as that value is appraised as part of the reverse mortgage process. This means that, regardless of how much is drawn on the loan, the borrower (or his or her heirs) will never owe more than the value of that home.
• If the heirs of the estate indeed sell the home to repay the reverse mortgage loan, they are able to keep any proceeds or profits off the sale of the home after the loan balance has been paid off. If the proceeds from the sale of the home are not sufficient to pay off the reverse mortgage loan, the lender absorbs the difference.