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Reverse Mortgage FAQ

The following Reverse Mortgage FAQ (frequently asked questions) are listed in the order in which they may be presented through the process of your reverse mortgage application.  Our detailed overview of the reverse mortgage questions that are most frequently asked by homeowners will help important questions faced by reverse mortgage borrowers. For answers to the following reverse mortgage FAQ, just click on the term:

Select your Reverse Mortgage FAQ below:

Eligible Properties for a Reverse Mortgage

Q: Will my property qualify for a reverse mortgage?
A: Reverse mortgages follow FHA eligibility standards for property types. Eligible property types include single-family homes, 2-4 unit properties, condominiums, townhouses and manufactured homes which are built after June 1976. Top ^

Reverse Mortgage Qualification Factors

Q: Are there many requirements to get a reverse mortgage?
A: The home must be your primary residence, you must be at least 62 years old, and have reasonable equity in your home.  Depending on the lender’s criteria, reverse mortgage lenders may conduct a financial assessment of a reverse mortgage borrower to assess whether or not the homeowner has the financial ability to pay property insurance, taxes, mortgage insurance, and also to maintain the property’s condition — terms which are agreed upon in the lender contract. Additionally, certain lenders may ask for statements and tax returns in order to accurately determine your income — including statements from any pensions, Social Security, IRAs and 401(k) plans — as well as a historical credit report. In some cases, the lender may require that a specified amount of the proceeds from the reverse mortgage loan be set aside to guarantee payments of future expenses. Top ^

Currently Existing Home Mortgage

Q: What happens if my home has a currently existing mortgage? A: Even though your home may have an existing mortgage, it is possible to to be eligible for a reverse mortgage.  The reverse mortgage must be in a first lien position, so any existing loans must be fully paid off with the funds generated by the reverse mortgage loan.  For example, let’s say you owe $50,000 on an existing mortgage. Based on your age, home value, and interest rates, let’s assume you qualify for $250,000 under the reverse mortgage program. Under this scenario, you will be able to entirely pay off any existing mortgage loans and closing costs, and still have roughly $200,000 in proceeds left. Top ^

Social Security and Medicare

Q: If I get a reverse mortgage, will the government take away my SSI or Medicaid? A: A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid or Supplemental Security Income (SSI), any reverse mortgage proceeds that you receive must be used immediately.  Cash generated from a reverse mortgage loan that is not utilized during the transaction may be classified as a personal asset and could impact eligibility.   Top ^

Costs with a Reverse Mortgage

Q: What common costs associated with a reverse mortgage?
A: If you plan on leaving your current home within the next few years, a HELOC may be a better option than a Reverse Mortgage.  With Reverse Mortgages, there are upfront costs and closing costs, in addition to future mortgage insurance payments and interest. Top ^

Payment Options

Q: What are My Payment Plan Options? A: You can choose to receive the money from a reverse mortgage all at once as a lump sum, fixed monthly payments either for a set term or for as long as you live in the home, as a line of credit, or a combination of these. To learn more, click here. Top ^

Amount of Proceeds

Q:  How Much Money Can I Get?
A:  The amount of funds you are eligible to receive depends on your age or the age of the youngest spouse included on the reverse mortgage loan. The appraised home value, interest rates, and in the case of the government program, the FHA lending limit, which is currently $625,500. If your home is worth more, then the amount of funds you may be eligible for will be based on the $625,500 loan limit.  For the first 12 months after reverse mortgage loan closings, you may not utilize greater than 60 percent of the available loan proceeds. After this period, there are no restrictions. 
There are exceptions to the 60 percent rule. If you have an existing mortgage, you may pay it off and take an additional 10 percent of the available funds, even if the total amount used exceeds 60 percent.
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Use of Proceeds

Q: How can I use the proceeds from a reverse mortgage?
A: The proceeds from a reverse mortgage can be used for anything, whether its to supplement retirement income to cover daily living expenses, repair or modify your home with improvements, pay for health care costs, pay off existing debts, cover property taxes, or potentially even prevent a future foreclosure. Top ^

Interest

Q: How does the interest work on a reverse mortgage?
A:  With a reverse mortgage, you are charged interest only on the proceeds that you receive. Both fixed and variable interest rates are available. Rates are tied to an index, such as the 1-Yr. Treasury Bill or the London Interbank Offered Rate (LIBOR), plus a margin that typically adds an additional one to three percentage points onto the rate you’re charged. Interest is not paid out of your available loan proceeds, but instead compounds over the life of the loan until repayment occurs.
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Growth Feature

Q:  My understanding is that the unused balance in the HECM Line of Credit Option has a growth feature. Does that mean I’m earning interest?
A:  No, you’re not earning interest like you do with a savings account. After the first month of your HECM loan, the principal limit increases each month thereafter at a rate equal to one-twelfth of the mortgage interest rate in effect at that time, plus one-twelfth of monthly mortgage insurance premium rate.  This growth should be considered a further extension of credit rather than an accrual of interest. Top ^

Loan Closing Date

Q:  What is the loan closing date?
A :  The Loan Closing Date for all HECMs is defined as the date on which you (the borrower) sign the note to your reverse mortgage.  This date must appear, and be identified, as the “loan closing date” in Block 1 on Page 1 of the Form HUD-1 Settlement Statement, which you are to receive at your loan closing. Top ^

Right of Rescission

Q: What is the Right of Rescission?
A:  Regulation Z of the federal Truth In Lending Act provides you (the borrower) with a right of rescission, or right to cancel your loan, for three business days after your loan closing. Lenders are prohibited from charging interest on the funds which are held available for you during the three day rescission period.  Interest must begin to accrue on the day after the disbursement is made. According to Regulation Z requirements, you must be provided with a copy of the Notice of the Right of Rescission at your closing.  This notice informs you of your right to rescind the contract within three (3) days of loan closing.  The notice must be signed and dated by you to indicate the date you received the notice. If you decide to rescind your contract, you must notify your lender within the three (3) days of your loan closing, according to the instructions provided on your Notice of the Right of Rescission. For example, if you signed your Note on Thursday, March 13, 2014, the rescission period would expire on Monday, March 17, 2014, and the disbursement of funds would take place on Tuesday, March 18, 2014.  The interest on the funds disbursed to you would begin to accrue on Wednesday, March 19, 2014. Top ^

Why Two Mortgages?

Q: Why did I sign two (2) Mortgages and Notes at my closing?
A: Your lender is in a first lien position and the Federal Housing Administration is in a second lien position. If your lender fails to meet its obligations under the terms of the Loan Agreement, FHA can step in and assume responsibility for the loan, so that you continue getting uninterrupted access to your funds.  Both the first and the second mortgage will be recorded with the county in which your property is located. Top ^

Servicing Fee

Q: What is the Service Fee Set Aside?
A: The service fee set aside is the dollar amount deducted from your Original Principal Limit and serves to ensure the future payment of your monthly servicing fee.  The amount of the service fee set aside is NOT part of your outstanding balance and is NOT accruing interest.  As the service fee set aside is not part of the loan balance, the funds remaining in the service fee set aside at time of loan repayment are not subject to refund. Q: Why am I charged a servicing fee?
A: The monthly servicing fee covers the costs associated with administering your reverse mortgage loan.  This administration includes, among other tasks, providing customer service, maintaining accurate records of your outstanding loan balance (including the interest and mortgage insurance premiums, etc) at all times, tracking your property taxes and your hazard insurance, certifying your occupancy status, issuing your statements of account, issuing and collecting payments, collecting on the loan when it becomes due, and discharging the mortgage. Top ^

Mortgage Insurance Premiums

Q: Why is there a Mortgage Insurance Premium with my HECM reverse mortgage? A: Under the HECM program, you will be charged a mortgage insurance premium (MIP) at closing that is based on the amount of funds withdrawn during the initial year. As long as you don’t take more than 60 percent of the available funds in the first year, you will be charged an upfront MIP of 0.50 percent of the appraised value of the home. If, however, you take more than 60 percent, the upfront MIP will be 2.50 percent. On a $200,000 home, 2.5 percent is $5,000 versus $1,000 if you were paying 0.50 percent. You also are charged MIP on an annual basis, however this fee doesn’t come out of your available loan proceeds. Rather, it accrues over time and you pay it once the loan is called due and payable. The annual premium is equal 1.25 percent of the outstanding loan balance. The MIP guarantees that if the company managing your account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid. The mortgage insurance premium is considered by the FHA to be a “fully earned premium” at the time of the loan closing and these mortgage insurance premiums are non-refundable. Top ^

Payments

Q: If my option selected is to receive monthly payments, when will those monthly payments begin?
A: Your first monthly payments are to be sent to you the first business day of the month following your loan funding date. For example, if your loan closed at the end of April and your loan funded in May, then your first monthly payment will be issued the first business day of June.   Q: Is it possible to change the payment plan term option that I selected?
A: If you have a Home Equity Conversion Mortgage (HECM), and your loan documents allow for a payment plan change, then yes you can change your payment plan. This means that you can change from monthly payments to a Line of Credit, or vice versa.  There is usually a fee associated with changing you payment plan.  Q: What about receiving late payments from the reverse mortgage loan company?  
A: Your loan servicer is to send your requested Line of Credit funds within five (5) business days of receiving your request for funds.  If you have scheduled monthly payments, then these funds are to be disbursed by the first business day of each month.  If your servicer does not disburse your funds within these timeframes, then your loan servicer is to pay you a fine equal to 10% of the payment that is due to you, plus interest on that sum for each additional day the disbursement is delayed.  This fine shall not exceed $500 for each instance of late disbursement.  This fine may not be added to your loan balance. Top ^

Prepayments

Q: Can I make a partial prepayment to my reverse mortgage account?
A:  Most reverse mortgages contracts allow for partial prepayment to your reverse mortgage account without penalty. It is important to discuss the partial prepayment options which may be available to you under the terms of your loan agreement with your reverse mortgage servicer. Q:  How are my partial prepayments applied to my loan balance?
A:  Each reverse mortgage product has specific guidelines for applying partial prepayments.  For example, if you currently have a HECM reverse mortgage, then your payments are applied in the following order: first to that part of your loan balance representing mortgage insurance premiums, secondly to that part of your loan balance representing servicing fees, thirdly to that part of your loan balance representing interest charges, and finally to that part of your loan balance representing principal advances.   Top ^

Interest Payment Tax Deductions

Q: Are the interest payments on a reverse mortgage tax deductible? 
A: Interest charges can only be deducted once those interest charges have been paid.  If you have made partial prepayments, then you must be certain that your prepayments have been applied to your interest charges and not the principal in order to deduct the payments. As always, be sure to consult with an income tax professional for any guidance relating to the deductibility of you interest charges relating to your finances. Top ^

Repair Information

Q:  What is a Repair Rider?
A:  In select cases, there may be a requirement that certain repairs to your property be completed so that your property meets the required reverse mortgage lending standards.  If completing such repairs was a condition of your loan closing, then you were to have signed a “Repair Rider” to your loan agreement. This Rider is your agreement to complete the required repairs within the time frame detailed in that Repair Rider. As a part of your loan agreement, failure to complete your repairs by the date stipulated in your Repair Rider is considered a default and will cause the suspension of all payments to you and may cause your loan to be called due and payable. Q: What is a “Repair Set Aside”?
A: The “Repair Set Aside” is a specific amount set aside from the total funds which will be spent only on completing the required repairs.  This“set aside” is not part of your loan balance until which time the funds are actually disbursed. Q:  Will inspections be required to verify the required repairs have been completed?
A:  The loan servicing company may have the required repairs inspected to verify completion.   Top ^

Statements

Q: Should I receive a statement of account from my loan servicer?
A: Yes.  Your loan servicer must issue to you a statement of account after each line of credit activity.  Your loan servicer must also issue to you a statement advising you of any impending interest rate change that may impact your reverse mortgage.  Annual statement will summarize all advances of principal, all Mortgage Insurance Premiums accrued, all interest charges, and all property charges paid in the prior year. Top ^

Occupancy

Q: Why is an Occupancy Certificate involved?
A: All reverse mortgages require certification that you continue to reside in the mortgaged property as your primary residence.  You must truthfully attest to your occupancy status on this Occupancy Certificate by signing the certificate and returning this Occupancy Certificate to your loan servicer.  Failure to complete this Occupancy Certificate in a timely manner may cause an interruption in your reverse mortgage payments and may eventually lead to a default in the terms of your loan agreement. Top ^

Property Taxes

Q: Does a reverse mortgage affect my property taxes? I have to pay my property taxes?
A: Yes, it is your responsibility to ensure that your property taxes are paid in a timely manner.  Failure to keep your property taxes current is considered a DEFAULT in the terms of your Loan Agreement and may be grounds for calling your loan due and payable. Q: What is a “Tax Set Aside”?
A: You may choose to have your reverse mortgage servicer pay your property taxes on your behalf.  You may work closely with your servicer so as to determine how much your property taxes are each year and for how many years you want your servicer to pay your taxes on your behalf.  The amount that is required to meet this tax obligation will be “set aside” from your available loan proceeds and will be used for the payment of your taxes.  These funds do not become part of your loan balance until which time the funds are actually disbursed. Q: Can I participate in a property tax deferral program?
A: You may only participate in a property tax deferral program if the lien created by your deferral program is subordinate to your reverse mortgage loan.  NRMLA strongly advises you to check with your loan servicer to determine if you reside in an area that might allow for a property tax deferral. Q: May I participate in a tax exemption program?
A: Yes, tax exemption programs are permitted under the reverse mortgage program.  NRMLA strongly suggests that you coordinate your participation in any tax exemption program with your loan servicer. Top ^

Hazard Insurance

Q:  Is Hazard Insurance required with a reverse mortgage?
A:  Yes, Hazard Insurance on your property is required with a coverage an amount that is equal to at least 100% of the insurable value of the home’s improvements at the time of your loan closing.  You must  provide your loan servicer with a copy of your Hazard Insurance policy and ensure that the policy is renewed upon expiration.  Q: What are “Set Asides” related to Insurance?
A: You may choose to have your reverse mortgage servicer pay your Hazard Insurance premiums on your behalf.  The amount that is required to meet these premium obligations will be “set aside” from your available loan proceeds and will be used for the payment of your Insurance premiums.  These funds do not become part of your loan balance until which time the funds are actually disbursed. Top ^

Flood Insurance

Q: Is Flood Insurance required with a reverse mortgage?
A:  You must maintain Flood Insurance f you live in an area that is flagged as having a potential for flooding as determined by FEMA. Q: Is it a new requirement for my home to have Flood Insurance? What changed?
A: Every so often, FEMA will make changes to their flood maps in order to account for the changes in flood risk depending on the area. If your property falls into a newly designated flood risk zone, then you are required to carry flood insurance in order to comply with your reverse mortgage loan terms. Top ^

Loan Assignment

Q: Why have I received a notice that my loan is being assigned to HUD?
A: Under the Home Equity Conversion Mortgage (HECM) plan, your loan servicer may assign your loan to HUD when your outstanding loan balance reaches 98% of the maximum claim amount. HUD will continue to administer your HECM reverse mortgage.  HUD will continue to issue your disbursements and will track your Property Taxes and Insurance. Top ^

Bankruptcy

Q: Will my personal bankruptcy filing affect my reverse mortgage?
A:  It is important to communicate with your loan servicer if any Bankruptcy action is taken.  If your reverse mortgage is not a HECM reverse mortgage, then Bankruptcy may be defined as a default under the terms of your loan agreement. Filing for Bankruptcy is not considered to be a loan default in the terms of the Home Equity Conversion Mortgage (HECM) Program. Under the HECM program, you cannot access any additional reverse mortgage funds unless that request for funds is approved by the entity monitoring the bankruptcy proceedings. Top ^

Maturity

Q: When does my reverse mortgage loan mature?
A:  Maturity occurs when your reverse mortgage loan becomes due and payable according to your lender agreement.  When the loan is mature, no additional money can be drawn from the reverse mortgage.  Reverse mortgages become mature and payable when:
  1. Borrowers passed away
  2. Property Title Sold
  3. No Longer Primary Residence
  4. Borrower not capable to Maintain Property
  5. Borrower not capable of paying property taxes and insurance
  6. Property requires maintenance but borrower unable to repair
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Payable and Dues

Q: What about paying back the reverse mortgage loan?
A: At anytime, you have the option to pay your reverse mortgage in full. Q: How long will my estate have to pay off the reverse mortgage?
A: When the reverse mortgage becomes due and payable.  From this point, your estate should communicate with the lender or loan service company in order to follow the payoff process.  In most cases, if a reverse mortgage loan becomes due and payment arrangements are not agreed upon, the lender has the option to initiate the property foreclosure process between 1 and 6 months from when the loan becomes due.  It is strongly advised to work closely with the loan servicing company or lender once the loan is due and negotiate payment arrangements. Top ^

Non-Recourse Provisions

Q: How do I know if my loan contains “non-recourse” provisions?
A: The majority of reverse mortgage loans are specified as non-recourse loans.  In practical terms, this means that if you decide to sell your home to pay the reverse mortgage loan, the balance owed on the loan will not exceed the home’s value.  For reverse mortgage borrowers that have a Home Equity Conversion Mortgage (HECM) loan, the debt may be paid off by paying either 95% of the current appraised value of the home or the mortgage balance — whichever amount is less.

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