Frequently Asked Questions
There are many questions our clients ask regarding Reverse Mortgages that we felt would be beneficial to include on our website.
WHAT IS A REVERSE MORTGAGE?
A Reverse Mortgage allows senior homeowners to convert a portion of the equity in their homes, eliminate monthly mortgage payments and gain tax-free* cash without losing title to the home. The equity that has been built-up over years of mortgage payments and appreciation can be paid-out to the homeowner(s). Unlike a traditional home equity line of credit or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. Reverse Mortgages offered by Reverse Mortgage Direct are all administered through HUD, and insured and guaranteed through FHA.
*(Consult your tax advisor)
HOW CAN I QUALIFY FOR A HUD REVERSE MORTGAGE?
HUD’s Federal Housing Administration (FHA) guidelines require that a borrower is a homeowner; is 62 years of age or older (or for married couples, at least one spouse must be at least 62); has a low enough mortgage balance that it can be paid off at the closing with proceeds from the Reverse loan or other assets; and must live primarily in the home to be eligible for a HUD Reverse Mortgage. Additionally, the borrower(s) must receive comprehensive consumer counseling from an independent, HUD-approved housing counselor prior to formal submission of the loan application.
WHAT TYPES OF HOMES ARE ELIGIBLE?
The home must be a single-family dwelling or a two-to-four unit property (with at least one of the units being owner occupied). Townhouses, detached homes, units in condominiums and some manufactured homes are also eligible. Condominium projects must be FHA-approved. The home must be in reasonable condition and must meet HUD minimum property standards. In some cases, necessary home repairs can be made after the closing of a Reverse Mortgage using loan proceeds.
WHAT’S THE DIFFERENCE BETWEEN A REVERSE MORTGAGE AND A BANK HOME EQUITY LOAN?
With either a traditional second mortgage or a home equity line of credit (HELOC), there must be sufficient income versus debt ratio to qualify for the loan, and monthly mortgage payments are required. The Reverse Mortgage is different in that the borrower receives the funds, and the qualification requirements may be significantly less.. The amount of funds available depends on age, current interest rate, other loan fees and the appraised home value (up to HUD loan limits). No monthly mortgage payments are required, because the loan is not due as long as the house remains the borrower’s principal residence. As with all home loans, real estate taxes and other conventional payments like insurance, utilities and any applicable homeowner association fees must be paid.
One additional difference: With a HELOC, the amount of funds that the borrower can draw is fixed at the outset, and it can never increase. However, a Reverse Mortgage credit line has a guaranteed growth rate attached to it. This means that the amount available to the borrower can grow over time, which can lead to a substantial increase in borrowing power.
CAN A LENDER TAKE MY HOME AWAY IF I OUTLIVE THE LOAN?
Absolutely not- The borrower cannot outlive a Reverse Mortgage! Nor is the loan due at a particular time. It does not have to be repaid as long as one of the borrowers continues to live in the house as his/her primary residence and keeps the taxes and insurance current. Furthermore, the borrower never has to repay more than the home’s value.
WHAT’S THE MOST THAT I CAN OWE?
Reverse mortgages are non-recourse loans. This means that in seeking repayment, the lender has no recourse against anything other than the home that secures the loan. Not income, not any other property or assets.
Imagine this scenario: You live to age 105, your home declines in value between now and then, and the total loan balance exceeds the value of the property- even with all of that, you still owe nothing above and beyond the home’s value! If you or your heirs sell the home to pay off the loan, the debt is generally limited by the net proceeds from the sale. This is why the mortgage insurance provided through FHA is so important. It is this insurance, which is included in the closing fees, that ensures your heirs are not personally liable for a single penny of your Reverse Mortgage obligation after you are gone.
WILL I STILL HAVE AN ESTATE I CAN LEAVE TO MY HEIRS?
When you sell your home or no longer use it as your primary residence, you or your estate will repay the loan proceeds received from the Reverse Mortgage, together with interest and related fees, to the lender. The remaining equity in your home, if any, belongs to you or your heirs. The Reverse Mortgage debt will never be passed along to your estate or your heirs.
HOW MUCH MONEY CAN I GET FROM MY HOME?
The amount you can borrow with a Reverse Mortgage depends on your age, the current expected interest rate, other loan fees and the appraised value of your home up to the HUD limits. Generally, the more valuable your home is, the older you are and the lower the expected interest rate, the more you can borrow. As of October 1, 2013, there is also a limitation as to what portion of the total can be drawn during the first year by certain borrowers.
HOW DO I RECEIVE MY FUNDS?
You can select from several payment options with a reverse mortgage:
TENURE PAYMENTS—Equal monthly checks as long as at least one borrower continues to occupy the property as a principal residence.
- Pro—this option ensures a specified monthly income for as long as you live in the home, regardless of interest rates, home value, the economy or anything else.
- Con—the amount you receive is based on the number of years to age 100, which means that the younger you are, the less you will receive monthly over the lifetime of the loan.
TERM PAYMENTS—Equal monthly payments for a fixed number of months selected by you.
- Pro—you can receive the maximum amount monthly for a given period of time.
- Con—When the term is complete, you will receive no more funds from your Reverse Mortgage, regardless of how long you continue to live in the home.
LINE OF CREDIT—unscheduled payments or installments, at times and in amounts of your choice, continue until the line is exhausted.
- Pro—a credit line allows you to have money available for emergencies or future purchases. The borrowing capacity of this credit line continues to grow, at no cost to you, and regardless of any changes that may occur in the value of the home.
- Con—the amount in the line of credit will reduce the amount that you receive every month if a tenure payment is also selected.
LUMP SUM—you receive a specified lump-sum payment when the loan is funded.
- Pro—you are able to receive cash immediately for large-item purchases, travel, home improvements, gifts to family members or anything else that you desire.
- Con—the amount that you take out in a lump sum will reduce the amount you receive every month if a tenure payment is also selected.
COMBINATION—many people will do a combination of two or more of these options
- For example, you could draw out some amount as a lump sum for a major home renovation, put some of the loan proceeds into a line of credit to serve as a “rainy day” fund, and use the remaining funds as a tenure monthly payment for as long as you live in your home.
WHAT CAN I DO WITH THE MONEY I RECEIVE FROM A REVERSE MORTGAGE?
The good news is that you can do anything that you want with the money; after all, it is your money! Many people put some of the funds in a line of credit that they will use in the future for in-home healthcare, medical costs and home repairs. Others may take vacations, buy a new car or help their kids or grand-kids with college or their first home. You decide how you want to spend the money!
WHAT ARE THE OUT-OF-POCKET COSTS?
There typically are no out-of-pocket costs to the borrower, except possibly the cost of the counseling.
All other costs can be financed with the loan and are included in the loan balance. Ultimately, they are repaid at the time you pay off your Reverse Mortgage. An itemized explanation of all costs is provided at the outset of the transaction.
WHAT ABOUT TAXES?
An American Bar Association guide to Reverse Mortgages advises that generally:
- The IRS does not consider loan advances to be income.
- Annuity advances may be partially taxable.
- Interest charged is not deductible until it is actually paid; that is, at the end of the loan.
As always, please consult your tax advisor for additional information.
WHAT ABOUT PUBLIC BENEFITS OR ENTITLEMENTS?
Social Security and Medicare benefits are not affected by Reverse Mortgages. However, Supplemental Security Income (SSI) and Medicaid are different. In general, these programs count loan advances differently than annuity advances.
Loan advances generally do not affect your benefits if you spend them during the calendar month in which you receive them. But if you keep an advance past the end of the month during which it was received (such as in a checking or savings account), then it will count as a “liquid asset”. The amount of money in a line of credit does not count toward income or total assets, so a combination of monthly income and a credit line typically will ensure that SSI or Medicaid eligibility is not affected.
Annuity advances reduce SSI benefits dollar-for-dollar, and can make you ineligible for Medicaid. That is not the case with a Reverse Mortgage where loan advances are spent during the calendar month when received. Therefore, if you are considering an annuity, and if you are now receiving or expect to someday qualify for SSI or Medicaid, you should check with the appropriate program office in your community. They can provide specific details on how annuity income would affect these benefits.
WHAT IS INVOLVED IN THE APPLICATION AND LOAN PROCESS?
An application can be completed in the convenience of your own home with the assistance of a Reverse Mortgage Direct representative. Documents necessary to process the Reverse Mortgage include: a driver’s license or other photo ID; Social Security or Medicare card; information on any existing mortgages or living trusts (if applicable); and the counseling certificate. The appraisal and any necessary pest inspection are completed by independent local professionals, and a preliminary title report is issued.
After receiving all pertinent information, the entire loan package is submitted to the lender’s underwriting department for final approval. Initial and expected interest rates are set, and final loan documents are signed by the borrower(s). After a three-day rescission period, the loan proceeds are disbursed and the home owner gets access to the funds. Any existing debt on the home is fully paid, and a new lien securing the Reverse Mortgage is placed on the property.
WHO DO I CALL FOR MORE INFORMATION?
Please do not hesitate to contact us for a free, no obligation information on how you or someone you know might benefit from a Reverse Mortgage.