A reverse mortgage, otherwise known as a Home Equity Conversion Mortgage (HECM), is a mortgage program that grants senior homeowners access to the accumulated equity in their property and the option to withdraw a portion as cash. The program is designed to benefit retirees and seniors living on a fixed income that would benefit with extra monthly cash income.
The Federal Housing Administration (FHA) through its Home Equity Conversion Mortgage (HECM) program insures the majority of reverse mortgages. Borrowers are first required to meet with a reverse mortgage counsel to consult about the costs and benefits of a reverse mortgage. The reverse mortgage counselor must be approved by the Department of Housing and Urban Development (HUD).
Reverse Mortgage Eligibility
- The homeowner must be at least 62 years old.
- The homeowner must have at least 40% Equity
- The property must be the borrower’s primary residence.
Moreover, any existing mortgages on the property must be small enough so that it can be paid off with the proceeds of the reverse mortgage. Before starting the loan process for an FHA/HUD-approved reverse mortgage, applicants must take an approved counseling course.
Reverse Mortgage Guidelines
No Income or Employment Verification
While standard home mortgages require verification of employment, income, and a variety of other criteria, reverse mortgage qualifications require borrowers are at least 62 years of age and own at minimum 40% of the equity on the home. While the HUD does not enforce a minimum amount of equity, borrowers can only secure a reverse mortgage if the funds from the transaction are sufficient to pay off the original mortgage. Applicants do not need to meet any income requirements since the value of the loan is determined based on the value of the home rather than the borrower’s stated income. However, new guidelines for 2014 state that the homeowner must have adequate income to maintain property taxes and insurance. Homeowners interested in obtaining a reverse mortgage must have enough income to maintain the property taxes and insurance before they can acquire a reverse mortgage, but may use a reverse mortgage loan to supplement income.
No Monthly Payments
With a Reverse Mortgage, there are no monthly payment obligations for the borrower. Reverse Mortgages do not put borrowers at risk of losing their homes with default risk, which makes them a great alternative to the traditional Home Equity Loan
Reverse Mortgage Home Condition Requirements
With a traditional mortgage, there are no home condition requirements following a home purchase, and homeowners are not required to keep their homes in good condition while paying off a traditional mortgage. However, for eligible seniors that qualify for a reverse mortgage
, the homeowners must keep their home in good shape and maintain insurance coverage, because it is in the lender’s best interest for the home to retain it’s value and appreciate over time.
Reverse Mortgage Equity Utilization
When purchasing a home with a traditional mortgage, there is a down payment and a mortgage loan is taken out to finance the remainder of the home’s purchase price. As the borrower makes monthly mortgage payments, the borrower accumulates equity in the home over time. In the case of a Reverse Mortgage, borrowers already have built equity in their home and are choosing to take out a cash loan that represents their home equity amount.
Reverse Mortgage Fees & Payments
Seniors with traditional mortgages must pay monthly interest fees in addition to mortgage payments. Conversely, reverse mortgages require no payments of interest until the borrower no longer lives in the home. Instead, many borrowers choose to pay for the upfront reverse mortgage costs with their loan proceeds and choose to pay the monthly insurance premiums and interest expenses separately.