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For seniors 62 and older, a reverse mortgage loan is a financial option that is available to those who qualify. This type of
loan is used to release the home equity in the property as one lump sum or multiple payments. There are no minimum
income or credit requirements, but there are other requirements and homeowners should make sure that they qualify for
the loan before they invest significant time or money into the process. For most reverse mortgages, the money can be
used for any purpose; however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse
mortgage and, if needed, additional personal funds. Before borrowing, applicants must seek third party financial
counseling from a source which is approved by the Department of Housing and Urban Development (HUD). The
counseling is a safeguard for the borrower and his/her family, to make sure the borrower completely understands what a
reverse mortgage is and how one is obtained.
Reverse Mortgages do not have most of the requirements of a standard mortgages like FICO scores, earnings
verification, or payment histories. The loan is based purely on the age of the youngest owner, the value of the home,
and any existing liens or mortgages on the home.
The amount of money available to the consumer is determined by four primary factors:
- The appraised value of the property, whether any health or safety repairs need to be made to the house, and
whether there are any existing liens on the house.
- The interest rate
- The age of the senior (The older the senior is, the more money he/she will receive).
- The location of the property, and whether the maximum loan amount is subject to the maximum loan limits. These
limits change on a county by county basis. There are also efforts to create a national maximum, so you need to
check periodically for those numbers. If those numbers go up in your area, you can refinance the reverse
mortgage and increase the funds you receive.
To apply for an FHA/HUD reverse mortgage, a borrower is required to complete a 45-minute counseling session with a
HUD-approved counselor. The counselor will explain the legal and financial obligations of a reverse mortgage. After the
counseling session, the borrower receives a "certificate of counseling" that is required before the loan application can be
processed.
The loan ends when the homeowner dies, sells the house, or, depending on the loan conditions, moves out of the house
for 12 consecutive months (for example, to go into an assisted living home or due to physical or mental illness the
borrower is not able to live in the property on which the loan has been taken. At that point, the reverse mortgage can be
paid off with the proceeds of the sale of the house, or if the borrower has died, the property can be refinanced by the
heirs of the homeowner's estate with a regular mortgage. If the proceeds exceed the loan amount including compounded
interest and fees, the owner of the house receives the difference. If the owner has died, the heirs receive the difference.
For cases where the proceeds are not sufficient to pay off the loan, then the bank (or insurance which the bank has on
the loan) absorbs the difference. The technical term for this cap on debt is "non-recourse limit." It means that the lender
does not have legal recourse to anything other than the value of the home when the loan is to be paid off.
In most cases when the borrower moves out of the property or dies, as long as the borrower (or his estate) provides
proof to the lender that he/she is attempting to sell the home or obtain financing to pay off the outstanding debt, the
investor will allow him up to one year to do so. After the one year extension period is up, the lender cannot provide any
further extension of time to the borrower (or estate).
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