Senior homeowners can qualify for a low-interest loan that will use the properties equity as collateral, this is called a “reverse mortgage.” The Federal Housing Administration (FHA) guidelines require in order for one to be eligible for a reverse mortgage, that all borrowers must be at least age 62.
This loan amount cannot exceed anymore than about 65% of the homes true value. For a reverse mortgage there will not be any income or credit guidelines to qualify. Reverse mortgages can be distributed to homeowners through a monthly payment, line of credit, or a one lump sum with the rest paid through periodic payments.
There are no restrictions on personal income, but the amount you can borrow does depend on your age, the current interest rate, the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally speaking, the more valuable your home is and the older you are, the lower the interest rate will be and the more you can borrow.
In general, you must meet the following requirements to qualify for a reverse mortgage:
- Be 62 years of age or older
- Own the property outright or paid-down a considerable amount
- Occupy the property as your principal residence
- Not be delinquent on any federal debt
- Have financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance and Homeowner Association fees, etc.
- Participate in a consumer information session given by a HUD- approved HECM counselor
Most home types can qualify for a reverse mortgage, but mobile homes must meet certain guidelines including: home must be on foundation permanently, must have been built within the past thirty years, and will have to pass an FHA home inspection.
Types of homes that qualify for a FHA reverse mortgage:
- Single-family homes
- 2-4 unit properties with at least one unit occupied by the owner
- Manufactured townhouses
The total amount of the mortgage balance will be a percentage of the properties true value, which will be factored by how old the youngest homeowner is at the time. This loan will not have to be fully paid to the lender until either the last homeowner passes away or moves away from the property for good.
Available payout options for reverse mortgages include:
- Fixed monthly payments until you no longer reside in the home as a primary residence.
- Pre-determined end date, you will receive funds for x amount of years.
- A flexible line of credit, enabling you to withdraw money when you choose and at the amount you need.
- Combination of the first and second payment option, allowing a portion of the available funding as a line of credit and receiving the rest through monthly/yearly payout options.
Although reverse mortgages offer seniors (ages 62 and up) lines of credit with the protections that many other mortgage products don’t come with, there are certain factors you need to consider before taking on this loan. Below you will find a list of some common advantages and disadvantages of a reverse mortgage loan.
Advantages that come along with a reverse mortgage
- Very easy to qualify, there will be no income or credit limit required.
- If the homeowner defaults on their mortgage their lender won’t take the home, as they would in a home equity loan.
- There is no requirements as to what you are allowed to spend the loan on. This loan can be spent anyway the borrower pleases.
- You are guaranteed a home and can remain in your property as long as you choose.
Reverse mortgage disadvantages
- This type of loan is due in full either when the homeowner vacates the property, or the homeowner passes away. If the borrower is planning on moving in the near future, it would not be wise to take out this type of loan.
- You may be required to pay higher closing costs.
- You will be required to have a decent amount of equity in the home. Usually lenders require 40-50% equity these days.
- With this type of loan, there will usually be no monthly payment required, therefore the interest rate and fees may be higher when the loan is due in full.
Not All of Your Equity is Accessible
The Federal Housing Administration (FHA) has set forth instructions for lenders to determine how much money can be taken out through a reverse mortgage. To determine the amount a household receives from a reverse mortgage, lenders calculate the age of the youngest borrower, current mortgage rate, and the appraised value of your home.
Additionally, reverse mortgages are not free. As with most loan programs, you’ll be required to pay mortgage insurance premiums, lender charges, and origination/servicing fees. However, make sure to speak with your preferred loan officer and inquire about these costs being rolled into the loan amount.
Risk of Losing Your Home for Unpaid Fees
Although reverse mortgages don’t have to be paid back like a regular mortgage, failing to pay utilities, flood insurance and real estate taxes could ultimately result in a foreclosure filing. Don’t risk losing your home due to unpaid fees!
Also, be careful when deciding which payout option you would like to take on. Recent studies have shown that nearly 70% of reverse mortgage borrowers choose to take out a large lump sum payment rather than monthly payouts. Borrowers can spend these funds quite quickly and have problems managing the standard costs of homeownership.
Every “Age-Eligible” Spouse is Recommended to Co-Sign (As a Co-Borrower)
Many people have chosen to put only the oldest household member on a reverse mortgage, mainly because this enables the household to receive higher payments. However, this leaves the other residents at risk of losing the home if the sole borrower dies. The “guarantee” that you can reside in the home until you no longer live in it as your primary residence only applies to borrowers on the loan. In situations where the sole borrower dies or relocates to a long-term care facility, lenders will not hesitate to file foreclosure proceedings and eventually evict the surviving spouse.
Although reverse mortgages are recognized as a great alternative to retirement for senior citizen homeowners with equity in their property, there are a few things that should be taken with extra caution. There are 4 specific things that a reverse mortgage borrower may have done with their old mortgage and thought nothing of it. If you try these 4 things with a HECM, you could be looking at losing your equity funds or worse, your home.
1. Renting out your home
Whether or not this includes all or just part of your home, renting out just an extra room or even the garage does not look to good to HECM lenders. This is because the actual requirements of an HECM specifically prohibits renting out any section of the property. Even if you decide to travel, renting, using the property as a boarding house or even as a bed-and-breakfast is prohibited according to FHA guidelines.
The property must also appear as the borrowers’ primary residence. Even in the case of financing a 2-4 unit residence, one of the units must count as the primary residence of the borrower.
2. Refinancing more
If the equity in your home wasn’t enough to get you the dream retirement fund you were going for, you are still out of luck. Borrowing more against your home is another absolute no under HECM guidelines. Home Equity Lines of Credit (HELOC) are not allowed as well. Even if your reasoning constitutes paying off the reverse mortgage, the option of a second, second mortgage jeopardizes the interests of your HECM lender.
Although refinancing more on your home isn’t aloud, you can refinance your reverse mortgage for a lower rate or to increase your line of credit.
3. Filing Bankruptcy
Bankruptcy may be a good option in other situation, but making a filing while having an HECM stops all payouts. Even if you think your servicer won’t notice, they will notice. Although a bankruptcy won’t allow you to be considered delinquent on your reverse loan, all payouts will still cease. To get your payments back, the bankruptcy has to be discharged and the servicer’s attorney must approve the resumption.
Terms under the case of bankruptcy are even worse with a non-FHA HECM loan provider. If your equity loan is from a private lender, you could have your home foreclosed on.
4. Adding someone on the title
Private lenders may call in your loan if this happens. Loan terms on this issue may differ, so be sure to double check them. FHA backed borrowers can add a non-borrower following closing. Although this privilege may save you for a short while, once the primary borrower passes, then the loan will become due and payable. At this time any added members will have to take out another mortgage to pay the existing reverse loan or move out so the property can be sold. Lenders’ rights always come before the rights of anyone else in this case.
Here is some contact information that will help you in your quest to get educated and make the best decision for your future.
One requirement to receiving a HECM is that the borrower meets with a HUD-approved housing counselor who has passed a special HECM exam prior to obtaining the loan. This is a protection to the consumer, as the terms and options associated with a reverse mortgage can be complicated. For instance, consumers need to fully understand that the up-front costs can be quite steep, and that money received from a reverse mortgage can be counted as income or an asset that restricts eligibility to some government programs. A reverse mortgage may not be your best option, and the counselor’s role is to review all the options available to you.
“Reverse mortgages are the perfect solution for some people, but not all. At your counseling session, feel free to keep asking questions until you completely understand the reverse mortgage product,” comments Gail Cunningham, spokesperson for the National Foundation for Credit Counseling (NFCC). “And, be sure to inquire if there might be a better option for you. If your financial need is short-term, there may be community programs that can help.”
The NFCC Member Agencies have close to 500 certified HECM counselors. If you’re considering a reverse mortgage, talk through your options with an NFCC Member Agency certified housing counselor. To be automatically connected to the agency closest to you, call toll free (800) 388-2227, or to find a counselor online, visit www.DebtAdvice.org.
The National Foundation for Credit Counseling (NFCC), founded in 1951, is the nation’s largest and longest serving national nonprofit credit counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior and build capacity for its Members to deliver the highest quality financial education and counseling services. NFCC Members annually help four million consumers through close to 830 community-based offices nationwide. For free and affordable confidential advice through a reputable NFCC Member, call (800) 388-2227, (en Español (800) 682-9832) or visit www.nfcc.org. Visit us on Facebook at http://www.facebook.com/NFCCDebtAdvice and on Twitter at http://twitter.com/NFCCDebtAdvice.
Reverse Mortgage Education Project
601 E Street, NW
Washington, DC 20049
U. S. Department of Housing and Urban Development (HUD)
451 7th Street, SW
Washington, DC 20410
Other Resource Links:
Further information on Federal Reverse mortgage loans can be found at HUD.
Applications for HECMs can be obtained at this HUD link.