What is a Reverse Mortgage?

Reverse Mortgage Loans

What is a Reverse Mortgage?

What is a reverse mortgage?

A reverse mortgage is a low-interest loan for senior homeowners that uses a home's equity as collateral. The loan amount is a percentage of the home's value and is based on the age of the youngest homeowner. The loan does not have to be repaid until the last surviving homeowner moves out of the property or passes away.

When that happens, the estate has about 12 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not liable if the home sells for less than the balance of the reverse mortgage.

Who is eligible to get a reverse mortgage?

To be eligible for a HUD reverse mortgage, the Federal Housing Administration (FHA) requires that all homeowners be at least age 62. The person must own your home or have paid off approximately half of your mortgage balance. If there is a mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at the closing (the moment in which you sign the legal documents). There are no income or credit requirements for a reverse mortgage.

Eligible home types

Almost all home types are eligible. However, mobile homes must be built in the last 30 years, you must own the land, it must be on a permanent foundation, and it must meet an FHA inspection.

What is the difference between a reverse mortgage and a home equity loan?

Generally, a home equity loan, a second mortgage, or a home equity line of credit has strict requirements for income and creditworthiness. Also, with other traditional loans the person must still make monthly payments to repay the loans. A reverse mortgage has no income or credit requirements and instead of making monthly payments, the person receives payments.

With a reverse mortgage the amount that can be borrowed is determined by an FHA formula that considers age, the current interest rate, and the appraised value of the home. The older the borrower is, the lower the interest rate. The more valuable the home (up to a certain point), the higher the loan amount will be.

With a traditional loan, borrowers are still required to make monthly payments, but with a reverse mortgage the loan is not due if the person stays in the home. With a reverse mortgage no one can be forced to foreclose or forced the borrower to vacate the home because of a missed mortgage payment. The borrower is still responsible for real estate taxes, utilities, and maintenance.

Outliving the reverse mortgage

No one can outlive a reverse mortgage. If at least one homeowner lives in the home (keeping taxes and insurance current) there's no need to repay the loan. Furthermore, the person will never owe more than the home's value (a reverse mortgage cannot become "upside-down").

Estate inheritance

In the event of your death or if the person no longer uses the home as his/hers primary residence, the estate can choose to convert the reverse mortgage into a traditional mortgage to keep the house or else sell the home to pay the balance (the cash borrowed, interest, and fees).

If the equity in the home is worth more than the amount owed to the lender, the remaining balance belongs to the borrower heirs. No other assets are affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from your estate to pay off the reverse mortgage.

If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA.

Loan limit

The available amount depends on three factors: age (older is better), current interest rate, and the appraised value of the home.

Use the calculator on this site to find out exactly how much you are eligible for

There are several ways to receive the proceeds of a reverse mortgage and you can mix and match as needed.

  • Lump-sum - a lump sum of cash at closing.
  • Tenure - equal monthly payments if you live in the home.
  • Term - equal monthly payments for a fixed number of years.
  • Line of Credit - take any amount you please at any time until the line of credit is exhausted.
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