The reverse mortgage originally came about in order to help seniors stay in their home as they age. While that premise remains unchanged, there are several new features and layers of protection built in to help today’s seniors more than ever before.
A reverse mortgage loan is, quite simply, a mortgage loan in reverse. With a traditional loan the homeowners borrow a sum of money and pay it back over a period of monthly installments, typically up to thirty years. With a reverse mortgage repayment is deferred until the homeowners pass away, move out for at least twelve months, default on tax and insurance requirements or fail to maintain the home. In other words, you can live in your home without having to make a traditional principal and interest mortgage payment ever again.
There are several ways this unique program works, here are a few examples:
Reverse mortgage on your current home
Whether or not you currently have a mortgage balance, as long as you are at least aged 62 and have enough equity in your home you are possibly a good candidate for a reverse mortgage. Mortgage proceeds can be used in several ways.
- Receive monthly checks. Known as Tenure Payments, this is monthly income that is determined at the outset and will continue to be sent to you as long as you live in the home and remain in compliance with reverse mortgage guidelines. Even if the reverse mortgage balance outgrows the property value, due to the safety valve of the FHA insurance, the monthly payments will continue. This is a great supplement to any other income sources and, because it is liquidated home equity rather than earned income, it is not subject to income tax. Also, this money generally does not affect eligibility for social security or Medicare. Homeowners receiving Supplemental Security (SSI) or Medicaid should consult their benefit administrator or advisor as these programs may have income or asset requirements.
- Lump-Sum payment. You may be eligible for a lump-sum payment at the close of escrow. You may even be able to get a lump-sum in addition to receiving monthly payments. The cash can be used for almost any purpose you can think of, though the FHA does not allow reverse mortgage proceeds to be used to purchase annuities. Home repairs, a vacation, a new car or medical expenses are just some of the many reasons why people consider a reverse mortgage lump-sum. Some homeowners simply like to spoil their grandkids or give their heirs their inheritance money early.
- Line of credit. Even if you don’t want monthly income and have no use for a lump-sum right now, a reverse mortgage line of credit can be a prudent choice, especially as a hedge against the uncertainties of the future. Unlike traditional credit lines, the unused portion of the reverse mortgage credit line is guaranteed to grow over time. This means that no matter what happens to the housing market, you will have guaranteed access to capital any time you want it. Here are some reasons to consider the credit line: What if you outlive your retirement savings? What if you need a new roof or other major home repair several years from now? What if you or your spouse need long-term medical care? What about unforeseen medical emergencies or other adverse situations? Wouldn’t it be nice to know that no matter what life throws at you, having access to quick cash could help relieve the stress? The reverse mortgage line of credit is the perfect tool for providing great stability and peace of mind any time financial adversity strikes.
Who is Eligible for a Reverse Mortgage?
At least one homeowner must be aged 62 at the time of application. If one spouse/partner is younger than 62 the reverse mortgage loan can still be an option, but it must be done in the older spouse’s name only. The younger partner may be considered as an “eligible non-borrowing spouse” and, as such, will still be afforded some of the protection of the program if they ultimately survive their older spouse. Translation….if you are an eligible non-borrowing spouse and your spouse passes away, you will still be able to remain in the home as long as you continue paying tax, insurance and keep up with maintenance. You would not be required to make principal and interest payments or reduce the loan balance. However, there would be no further access to funds from the reverse mortgage.
Homeowners must continue to reside in the property and pay property tax and homeowners’ insurance. If you live in a condominium or planned unit development, any HOA dues must also be paid. If the homeowners move out for at least twelve months the loan becomes due and payable.
The homeowner must also maintain the property in safe and habitable condition. This is a bit of a grey area and it often causes unnecessary concern. Lenders expect that normal wear and tear will occur to a property. However, serious property deterioration or health and safety-related issues with the home could cause the homeowner to be in default.
One of the other requirements is having a fair amount of equity. However, unlike traditional mortgages, the loan amount is not calculated as a percentage of the home’s value (also known as loan-to-value ratio). Rather, the age of the applicants is one of the biggest factors in determining the loan amount. Generally speaking, the older an applicant, the greater the loan amount they would be eligible for.
Since April of 2015 all reverse mortgage applicants must now meet the requirements of “Financial Assessment”. Simply put, the lender needs to determine that you have sufficient income or assets to stay current on your reverse mortgage obligations, such as tax, insurance and maintenance. While this will mean that many people who would have qualified for a reverse mortgage previously will no longer be eligible, those who do qualify are less likely to default on their commitments, thus making the program more stable overall. Because there are no principal and interest mortgage payments to be considered, the income requirements for a reverse mortgage are much lower than they are for traditional home loans and they actually vary by property location and household size. Feel free to call us for the specific “financial assessment” requirements for your area.
Credit history is also now given greater consideration, though the guidelines are generally far more lenient than those for traditional mortgages. Even serious credit occurrences, such as bankruptcy or foreclosure, are not necessarily going to mean an applicant is automatically declined. The reverse mortgage underwriters will consider the reasons for the poor credit and may still issue an approval if there were compelling reasons which caused the credit problem.