What is a Reverse Mortgage?
A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), is a loan available to homeowners age 62 or older that allows borrowers to turn their home’s equity into cash. Unlike a traditional loan or second mortgage, the borrower does not have to repay the home until they no longer live at the residence or fail to meet their mortgage obligations.
Traditionally, a reverse mortgage is a great option for those looking to pay for their basic needs in retirement. Most borrowers can use this as a form of income while they are waiting to free up other retirement funds, such as a 401k. This also allows the borrower to free themselves from old debts or supplement their monthly income.
The Reverse Mortgage Process
Reverse Mortgage Myths
NOT TRUE – This is just a mortgage loan and you retain ownership for as long as you live. Then your estate determines its fate.
NOT TRUE – While you must have equity in your home, we can pay off the current mortgage with the reverse mortgage. This is done frequently.
NOT TRUE – When it comes time for you or your heirs to pay off your loan, it can be paid in full, refinanced or sold – it’s your choice.
NOT TRUE – We personally work with a lot of financial planners to increase financial stability in different ways. Many seniors are concerned about outliving their assets. Using their home equity will help preserve their liquid assets which is critical in our current economic environment.
NOT TRUE – These are considered loan proceeds and not income, so they do not affect your benefits. It’s TAX-FREE income.
NOT TRUE – Your heirs are entitled to all the equity in your home once the reverse mortgage is paid off.
NOT TRUE – If you live to 150, you can never be forced out of your home and no mortgage payments are ever due.
NOT TRUE – As long as you keep your property taxes and insurance current and live in the home, you can NEVER be forced out.
NOT TRUE – There are specific provisions, guaranteed by FHA, that state you can never owe more than what the house is worth.
NOT TRUE – The costs have been significantly reduced in recent years and the costs are deducted from loan proceeds. You do not pay these out of pocket.
Reverse Mortgage FAQs
HECM, the Home Equity Conversion Mortgage, for purchase allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the reverse mortgage.
The program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction and still avoid having an ongoing mortgage payment. The owner would still be responsible for property taxes, insurance and maintaining the property.
Existing one-to-four unit properties where construction has been completed and the property is habitable. See ML 2007-06.
No. The lender may only take an application once the Certificate of Occupancy, or its equivalent, has been issued.
The following property types are considered ineligible:
- Newly constructed residence where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority
- Cooperative units
- Boarding houses
- Bed and breakfast establishments
- Existing manufactured homes built before June 15, 1976
No. Seller concessions are applicable to forward mortgages only.
Yes. Although one spouse will become the HECM mortgagor, the lender must obtain the credit report for a review of financial obligations, monetary judgments, and liens that could jeopardize the HECM lien status/clear and marketable title.
The senior may decide to cancel the purchase transaction at any time prior to the date of closing. If the senior decides to cancel the transaction, he/she must notify all parties in writing. Where earnest money has been provided, the senior should review the sales contract to determine if the earnest money is refundable. The Federal Reserve Board of Governors should be contacted for the right of rescission and Truth in Lending Act guidance.
The title company (settlement agent) is responsible for disbursing funds in accordance with state law.