A reverse mortgage is a loan that allows homeowners 62 years of age and older to use their home equity. The loan is federally insured by HUD.
Borrowers must meet with a HUD-approved counselor to discuss their eligibility, financial implications and other loan alternatives. HUD also requires borrowers to pay upfront fees and mortgage insurance.
Qualifications
There are some basic requirements that must be met to qualify for a reverse mortgage. These requirements are set by HUD (Department of Housing and Urban Development) and individual lenders. Some of these requirements involve home ownership and ensuring that the property meets certain standards for safety.
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This can include ensuring that the property is free of fire hazards, mold, asbestos and other problems. The lender will require an appraisal of the property before approving the loan.
Lenders will also look at other factors such as debt-to-income ratio requirements and ensuring that you have enough financial resources to pay ongoing homeownership expenses like property taxes, homeowners insurance and homeowner association fees. They will also make sure that you have enough equity in your home.
You cannot owe more than your home is worth. This limit is called a non-recourse limit. In the event that you are unable to repay the loan, your heirs will only be responsible for the value of your home.
Interest Rates
Reverse mortgages can have fixed or adjustable interest rates. A fixed rate can protect a borrower from unexpected increases in mortgage rates. However, it also limits the amount of money a borrower can access.
An adjustable-rate reverse mortgage allows borrowers to choose how they receive their loan funds — a lump sum, monthly payments or a line of credit. In either case, the lender must add interest charges to the outstanding balance each month.
Lenders conduct financial assessments on each prospective reverse mortgage borrower to ensure they have the financial capacity to pay mandatory obligations, such as property taxes and homeowners insurance. If the lender finds that a borrower may struggle to meet these obligations, they may set aside a portion of the loan to pay them in future.
Many people use a reverse mortgage to supplement their retirement income or pay for home repairs, but it’s important to understand how these loans work before using them. Most reverse mortgages are owner-occupier loans, and the borrower must occupy the property as their primary residence. Otherwise, they could lose the property to creditors or heirs.
Fees
Most reverse mortgages — especially those backed by the Federal Housing Administration — require no repayment for as long as you live in your home. But you must continue to pay property taxes and homeowner’s insurance as stipulated in your loan agreement. Lenders are required to conduct a financial assessment of all borrowers to ensure they have the resources to meet these obligations in the future.
If you receive a reverse mortgage, your loan servicer must issue you an annual statement of account that summarizes all advances of principal, Mortgage Insurance Premiums accrued and interest charges paid in the prior year. Your loan servicer should also advise you of upcoming changes in interest rates that may impact your reverse mortgage.
Taking out a reverse mortgage can help you make the most of your retirement savings, pay for necessary home repairs or improve energy efficiency, and avoid turning to high-interest credit cards or other loans. However, this unique financial product isn’t right for everyone. To learn more about the pros and cons of a reverse mortgage, speak with a HUD-approved counselor.
Requirements
Unlike home equity loans or HELOCs, reverse mortgages don’t have income or credit score requirements. However, the borrower must be able to pay property taxes and homeowners insurance. Otherwise, the lender could lose its interest in the house.
Lenders impose these requirements to protect themselves from the possibility that borrowers might default on their loan or damage the property. In addition, they may require that borrowers undergo counseling by a HUD-approved agency to understand the risks and benefits of the loan.
It’s important to compare fees and rates between lenders, because some have more stringent criteria than others. For example, some lenders require that the borrower own their home outright or have a low mortgage balance, and they must be financially able to keep up with property charges like insurance, taxes, and homeowner’s association fees.
Additionally, some lenders may offer additional services or recommend other financial products such as annuities to borrowers. But it’s illegal for lenders to pressure borrowers to purchase other products or services during the reverse mortgage process.
