Steps to Applying for a Reverse Mortgage
Once homeowners have learned about the advantages of reverse mortgages and decided that a reverse mortgage is appropriate for their situation, they can begin taking steps to secure the reverse mortgage loan.
Stage One: Counseling
Prior to applying for a reverse equity mortgage, all candidates must obtain third-party financial counseling from a Department of Housing and Urban Development-approved counseling agency. Reverse mortgage counseling is required for all reverse mortgage candidates. Counseling can be conducted over the telephone or during an in-person session.
Stage Two: Applying
During the reverse mortgage application process, the borrower completes application paperwork and selects a payment plan. Documentation required in this phase includes:
Social Security number verification
A copy of the deed to the property
Information on any existing mortgages and/or liens
Counseling certificate
During the application process, the reverse mortgage lender must disclose the estimated total cost of the loan (as required by the federal Truth in Lending Act.)
Stage Three: Processing
During this stage, the lender will order a certified appraisal to determine the value of the property. The appraiser must certify that the physical condition of the home meets all FHA guidelines. The cost of the appraisal and any necessary repairs to bring the property up to code are paid by the borrower.
Stage Four: Underwriting
Once the lender has processed all application and appraisal documents, the homeowner and reverse mortgage lender must finalize the details of the loan, including the payment plan and interest rate adjustments. The lender then presents the loan package for final approval. Underwriting generally takes between four and eight weeks.
Stage Five: Closing
The closing (signing of loan documents) is scheduled upon approval of the loan package. Closing costs are generally financed as part of the loan, so the borrower does not pay these costs out of pocket.
Stage Six: Payment
The homeowner has three business days after the closing to decide to cancel the loan. After the three-day period has expired, the loan monies are disbursed according to the borrower’s selected payment plan. All existing liens on the home are repaid and the reverse mortgage lien is placed on the property.
Once all existing liens are repaid, the borrower can use the funds from the reverse mortgage in any way they see fit.
Stage Seven: Repayment
All loan payments are deferred as long as the property remains the borrower’s primary residence. There is no obligation to repay the loan until the owner dies, the home is sold, or the owner otherwise vacates the property for 12 consecutive months (for example, to move into an assisted-living facility).
The reverse equity mortgage is ultimately repaid using the proceeds from the sale of the house. The borrower’s heirs may also repay the loan by refinancing the property with a traditional mortgage. The amount of the loan cannot exceed the home’s sale price; if the proceeds from the sale of the property are enough to repay the loan, the lender covers the difference.
If the proceeds from the sale exceed the loan balance, the homeowner (or the homeowner’s heir) receives the difference.