Reverse Mortgage FAQ
Frequently Asked Questions
Most, but not all, reverse mortgages today are federally insured through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) Program.
This advertisement talks about HECM loans only. Further, this information is only valid in the State of Colorado.
A HECM reverse mortgage is a unique loan that allows homeowner(s) 62 years of age and older to draw on the equity in their home, which is paid to the homeowner(s) in a variety of payout options. One aspect of this loan is that it does not require repayment until the homeowner(s) no longer reside in the residence, the last surviving borrower (or non-borrowing spouse) passes away or does not comply with the loan obligations such as paying property taxes and insurance, and maintaining the property to FHA guidelines. Regulated by the U.S. Department of Housing and Urban Development (HUD), this federally-insured loan helps those in the senior population meet their financial needs and may ease money worries for greater peace of mind.
Homes eligible for a reverse mortgage include single-family homes, detached homes, townhouses, and two-to-four unit properties that are owner-occupied. Condominiums must be FHA-approved. Some manufactured homes are eligible but must meet FHA guidelines. Contact your loan officer for more details on manufactured home eligibility.
The amount of money that a lender will loan depends upon how old you are at the time of closing, how much your house is worth, the total amount of liens, and interest rates. The payoff of your existing mortgage and mandatory obligations along with the payment option chosen will affect the amount of money you will receive. HUD limits borrowers to using 60% of the available money (after closing costs & fees) in the first year. The remaining funds are accessible beginning year two. This maximum disbursement limit set by HUD allows for the GREATER of: 1. 60% of the Principal Limit (amount of money available to borrower in all years of the loan) in the first 12 months of the loan from your closing date OR… 2. The sum of Mandatory Obligations (existing mortgage payoff, tax liens, closing costs, mortgage insurance premium) plus 10% of the Principal Limit. This total cannot exceed the total the Principal Limit at the time of loan closing.
Reverse mortgage payments can be received in one of five ways:
• Tenure: equal monthly payments
• Term: equal monthly payments for a fixed period of months as decided by the borrower
• Line of Credit: payments made in installments or at various times and in amounts dictated by the borrower(s)
• Modified Tenure: monthly payments with a line of credit
• Modified Term: monthly payments for a fixed period of months with a line of credit
No. As long as one of the borrowers on the loan note lives in the home, continues to pay the taxes and insurance and maintains the home in good condition, you will not need to repay the loan. Once the last surviving borrower passes away or the obligations of the loan are not met, the loan becomes due and must be repaid (either by sale of home or refinance).
No. You do not need to pay off your home to qualify. However, the loan proceeds you receive from a reverse mortgage must be used to pay off the existing mortgage or liens (if there is a mortgage balance owing)
You will continue to hold title to your home subject to the mortgage lien securing the reverse mortgage loan. This means you must continue to maintain your property, pay your property taxes, homeowner’s insurance, and homeowner’s association dues and comply with the terms of the loan. Failure to meet these requirements can trigger a loan default leading to foreclosure.
The loan proceeds you receive from a reverse mortgage are usually tax free.* You are not required to pay monthly mortgage payments, including principal and interest. However, since you hold the title to your home, you are still responsible for property taxes, insurance, utilities, fuel, maintenance, and other home-related expenses. NOTE: This is not tax advice; you should consult with a tax advisor to provide guidance for your particular situation.
Once the last surviving borrower no longer resides in the home as his/her primary residence, the loan becomes due and you or your estate is responsible for repayment of the money you received from the reverse mortgage, plus interest and other fees as agreed upon in the beginning. Any remaining equity belongs to either you or your heirs. You or your heirs will not owe more than the value of the home, as long as you abide by the loan terms. The reverse mortgage is insured by the Federal Housing Administration (FHA), and they will be responsible for the portion of the pay-off that exceeds the value of the house when the loan the loan is repaid.
NOTE: This is not legal or financial advice. Please consult with an attorney or financial advisor for your specific situation.
The fees and cost of a reverse mortgage are based on a number of items. For example, an origination fee is paid to the broker/lender, a MIP (mortgage insurance premium) is paid to HUD on the Home Equity Conversion Mortgage (HECM), an appraisal fee, a flood certification fee, a doc prep fee, title and settlement fees, and other standard closing costs. Monthly servicing fees could apply.
The upfront Mortgage Insurance Premiums (MIP) are either 2.5% or .5% depending on how much of the Principal Limit (amount you can borrow) you use in the first year. If your total mandatory obligation payoffs (existing mortgage payoff, tax liens, closing costs, upfront mortgage insurance premium) exceed 60% of the Principal Limit your upfront MIP is calculated at 2.5% of your homes appraised value up to the national lending limit of $625,500. If your total mandatory obligations and cash taken in the first year are 60% or less of the Principal Limit your upfront MIP charge is .5% of the homes appraised value or national lending limit (whichever is less).
Prior to applying for the loan, it is required that you are made aware of the terms and conditions of the loan through sources provided by HUD, and to protect you from receiving incorrect information. The lender must be in receipt of the counseling certificate before they can close the loan. Contact the Housing Counseling Clearinghouse at 1-800-569-4287 to obtain the name and telephone number of a HUD-approved counseling agency. I can also provide you with the list of HUD-approved reverse mortgage counseling agencies.
Reverse mortgages have become more popular because they allow the borrower to receive loan proceeds that do not require immediate repayment as long as: you remain in your home as your primary residence, do not sell your home, at least one borrower lives in the home, you meet the basic income and credit standards, and follow loan guidelines. Obtaining a home equity loan (or home equity line of credit or second mortgage) requires that you have sufficient income to cover the debt- plus, you must continue to make monthly principal and interest mortgage payments. With a reverse mortgage you must meet basic income and credit guidelines but you do not make monthly principal and interest payments. Keep in mind you must continue to pay all property related fees, taxes and homeowner’s insurance and maintain the property in good condition.
A reverse mortgage was created so borrowers don’t have to pay most fees during the course of the loan. Typical upfront costs are for the appraisal and HUD-approved reverse mortgage counseling (some agencies waive counseling fees at their discretion). However, monthly FHA mortgage insurance must be paid, and there may be a monthly servicing fee associated with reverse mortgages (both of which will be financed and added to the loan balance). For more information, please talk to your loan originator.
HUD advises against using any service that charges a fee (except required HECM counseling) or any service that requests a lender referral fee, to obtain a reverse mortgage. HUD provides this information free of charge and can direct you to HUD-approved housing agencies that offer approved reverse mortgage counseling or additional services that are free or have a minimal cost. HECM counseling fees are determined by each counseling agency. If the borrower cannot afford the fee some agencies will waive the fee for qualified applicants. You can find a HUD-approved housing counseling agency near you by calling 1-800-569-4287 toll free.