Reverse Mortgages

 

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you.  However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.  You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

Application Process

 

The application process for a reverse mortgage generally takes about 30-45 days from start to finish and has five major steps. However, the longest part of the reverse mortgage process is the decision-making process that leads up to the application.

 

Homeowner(s) typically research reverse mortgages using resources such as this site for several months. Next they request information from a local reverse mortgage specialist. The homeowner may invest one to two months meeting with the specialist in person and reviewing the good faith estimate and other loan documents.

 

Step 1. Initial Application

 

The application legally authorizes the lender to begin the application process but the lender cannot incur any costs on your behalf until Step 2 (counseling) is completed. The application is not binding and can be canceled at any point during the process.

 

Step 2. Reverse Mortgage Counseling

 

Even if the application has been completed, the lender is not legally permitted to incur any costs on the applicant’s behalf (such as ordering the appraisal) until the applicant has submitted a signed HECM Counseling Certificate. This is proof that the applicant has completed the mandatory counseling session with a HUD-approved counseling agency.

 

Step 3. Appraisal

 

The appraisal establishes the legal value of the applicant’s property. The reverse mortgage appraisal must be conducted by an independent HUD approved appraiser (not all appraisers have this approval) and it must follow specific HUD guidelines. This means that even if a homeowner already has an appraisal, it will most likely have to be re-appraised.

 

Step 4. Underwriting

 

The Underwriter reviews all of the documentation and identifies conditions to be satisfied prior to closing related to any additional or missing items. Once the conditions have been completed, the final closing date can be set.

 

Step 5. Closing

 

The lender and the applicant set a closing date where a notary or attorney meets with the applicant to sign the final closing documents. Once the closing documents are signed, there is a three-day ”right of rescission” period. This means that even though the closing has taken place, the applicant can still cancel the loan with no penalty for three business days after the closing. The three-day “right of rescission” period does not apply to the HECM for Purchase Product.

 

Following the right of rescission period, the title company will issue a check or wire the funds to the borrower’s account. If the applicant was using the reverse mortgage proceeds to pay off an existing mortgage, the title company will also send the mortgage payoff amount to the lender.

 

 

Eligibility & Requirements

 

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you.  However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.  You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

Reverse Mortgage Fees

 

Closing Costs

 

The three largest closing costs are the Federal Housing Administration (FHA) mortgage insurance, the origination fee, title and other closing settlement fees. However, the only cost that is typically paid out-of-pocket is for  HUD counseling.

 

FHA Mortgage Insurance Premium (MIP)

 

A HECM loan requires the borrower to pay an initial Mortgage Insurance Premium (MIP), as well as an annual MIP of 1.25%.  (Please see chart below for more information regarding the initial MIP.)

 

Reverse Mortgage - MIP Chart

 

Once the initial MIP percentage has been determined, the MIP is calculated by multiplying the initial MIP percentage by the Maximum Claim Amount (MCA). The MCA is defined as the lesser of the appraised value, sale price or the maximum lending limit.

 

The FHA MIP provides these guarantees:

•If you or your heirs sell your home to repay the loan, your total debt can never be greater than the value of your home

•You will continue to receive your HECM proceeds, based upon the program plan you selected, even in the event that your lender becomes financially troubled

 

Origination Fee

 

The origination fee is what the reverse mortgage lender earns on the loan. HUD uses a formula to determine what the lender can charge. The formula is:

•2% of the first $200,000 of the property’s value and 1% of the amount over $200,000

•A maximum of a $6,000 origination fee

 

Title and Closing Settlement Fees

 

Title guarantees the homeowner’s legal ownership of the property. These fees are required for all mortgages whether it is a reverse or conventional loan. The largest part of title fees is title insurance. Title and closing settlement fees are usually broken down into:

•Title insurance (varies by state and with property value)

•Title settlement

•Title search/exam

•Recording

•Delivery/courier

•Payoff (if a mortgage is being paid off)

•Notary

•Document preparation

 

Appraisal

 

The appraisal establishes the legal value of the home. A reverse mortgage appraisal is conducted by an independent HUD approved appraiser and follows specific HUD guidelines that require more specific documentation than a typical appraisal.

 

Other Closing Costs

•Counseling fee

•Wire fee

•Flood certification fee

•Credit report fee

 

Interest

 

A reverse mortgage loan accrues interest similar to a traditional mortgage except the homeowner is not making payments (interest or principal) each month to reduce the loan balance. As a result, the loan balance grows with a reverse mortgage until the loan becomes due, usually when the homeowner permanently moves out of the property or passes away.

 

Interest Rate and Mortgage Insurance

 

Over the last few years, the interest rates on reverse mortgage loans have fluctuated between 3% and 5%. The true interest rate is one and a quarter percentage points above the quoted rate because the total rate includes the FHA’s ongoing Mortgage Insurance Premium (MIP) charges. For example, if the quoted rate is 4.51%, with the MIP charges of 1.25%, the total rate would be 5.76%.

 

 

Frequently Asked Questions

 

Obtaining a reverse mortgage loan is a big decision. It’s normal for you and your family to have questions and hopefully the answers below can help put your mind at ease. If you don’t see your question, feel free to call one of our Reverse Mortgage Advisors. They’re highly knowledgeable and are here to offer impartial advice. When you’re ready to apply, they’ll work with you through every step of the process. Call today at 877-430-2274

 

Question and Answers about Reverse Mortgage Loans

 

What is a reverse mortgage loan?

 

A reverse mortgage is a loan that allows you to access a portion of your home equity without having to make monthly mortgage payments.1 With this type of loan, you maintain the title to your home. The loan typically becomes due when the last borrower(s) permanently leave the home. Provided the home is sold to repay the loan, the borrower will never owe more than the appraised value of the home.

 

If no monthly payments are required, how is my reverse mortgage loan paid back?

 

To pay off the loan balance, you or your heirs can sell the home or you can pay the loan balance and keep the home.

 

How do I qualify for a reverse mortgage loan?

 

To qualify, you must be age 62 or older and be the titleholder to your home. In addition, you must have sufficient equity in your home and you must meet financial eligibility criteria as established by HUD.

 

What if I have an existing mortgage?

 

If you currently have a mortgage, that’s okay. However, a portion of the funds you receive from your reverse mortgage loan (or funds from another source) must be used to pay off any existing mortgage you have on the property at closing.

 

Is my home eligible?

 

Your home must be a single-family residence in a 1- to 4-unit dwelling, or a FHA-approved condominium.

 

Will I still own my home or will I lose it?

 

You will still own your home and you can stay in it for as long as you wish, provided you pay your taxes, insurance and maintain the home according to FHA requirements.

 

Are there property and insurance requirements?

 

Since you still own your home with a reverse mortgage loan you’re responsible for the general maintenance and upkeep as well as for paying all ongoing property taxes and insurance. You can often pay for these expenses with funds from your reverse mortgage loan.

 

What types of loans are available?

 

All of our loans are Home Equity Conversion Mortgages (HECM). Always ask to see a comparison of various loans so you have a complete understanding of what is available. Your Reverse Mortgage Advisor can objectively help you decide which of our FHA insured products best fit your needs.

 

How much of my home’s equity can I access with a reverse mortgage loan?

 

The loan amounts vary based on a number of factors including which reverse mortgage loan product you choose. The amount you can receive depends on the age of the youngest borrower, current interest rates, and the lesser of the appraised value of your home, the sale price or FHA maximum lending limit. You may need to set aside additional funds from the loan proceeds to pay for taxes and insurance.

 

How can I use the money?

 

After paying off any existing mortgage, the money you receive from your reverse mortgage loan can be used any way you choose such as paying for medical expenses (including in-home care), home improvement, travel, and living your retirement dreams. There are no limitations or restrictions, once you receive the net proceeds.

 

What costs are involved with a reverse mortgage loan?

 

As with any loan, there are closing and other costs. However, most fees can be financed as part of the loan. The HUD counseling fee is the only out-of-pocket cost.

 

Will I have to pay any taxes?

 

No, the loan proceeds are not taxed as income or otherwise (though you must continue to pay required property taxes).

 

Will this loan affect my Social Security or Medicare benefits?

 

HECM reverse mortgage loan payments typically do not affect your Social Security or Medicare benefits. However, regulations vary for the Federal Supplemental Security Income program and for state-administered programs such as Medicaid, Aid for Dependent Children (AFDC), and food stamps. We suggest that you consult a benefits specialist at your local Area Agency on Aging or the local offices for these programs to determine how HECM payments may affect your particular situation.

 

How will I receive the available funds?

 

The most common way is to draw from a line of credit to use at your discretion. However, you may also choose to receive a single lump sum, regular monthly installments, or any combination of these options.

 

Will my family or estate ever owe more than the value of my home?

 

No. With a FHA-insured reverse mortgage loan you’ll never owe more than the appraised value of your home when the loan comes due, so long as the home is sold to repay the loan.

 

What if I want to leave our home to the kids?

 

You can still leave it to your children, or to anyone you choose. When the loan becomes due, you or your heirs have the option of paying off the full balance of the loan and keeping the home.

 

Will I incur any penalties if I decide to pay back the loan early?

 

No. You can pay back the loan at any time without the worry of being penalized.

 

If my parents have a reverse mortgage, what should I do in the event of their passing?

 

You should first contact the loan servicer to notify them that the borrower(s) have passed away. You can typically find the servicer’s contact information on the monthly statement. Once the loan servicer has been notified, they will help you (the heirs) with next steps.

 

 

 

1 You must still live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to Federal Housing Administration requirement. Failure to meet these requirements can trigger a loan default that results in foreclosure.

 

 

Application Process

Eligibility

Reverse Mortgage Fees

Frequently Asked Questions

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