Think of a reverse mortgage as a conventional mortgage where the roles are switched. In a conventional mortgage, a person takes out a loan in order to buy a home and then repays the lender over time. In a reverse mortgage, the person already owns the home, and they borrow against it, getting a loan from a lender that they may not necessarily ever repay.
In the end, most reverse mortgage loans are not repaid by the borrower. Instead, when the borrower moves or dies, the borrower’s heirs sell the property in order to pay off the loan. The borrower (or their estate) gets any excess proceeds from the sale.
How Does A Reverse Mortgage Work?
The process of using a reverse mortgage is fairly simple: It starts with a borrower who already owns a house. The borrower either has considerable equity in their home (usually at least 50% of the property’s value) or has paid it off completely. The borrower decides they need the liquidity that comes with removing equity from their home, so that’s where we come in to help the borrower find a program.
Once the borrower picks a specific loan program, they apply for the loan. We do a credit check, reviews the borrower’s property, its title and appraised value. If approved, the loan is funded, with proceeds structured as either a lump sum, a line of credit or periodic annuity payments (monthly, quarterly or annually, for example), depending on what the borrower chooses.
After a the reverse mortgage is funded, borrowers use the money as provided for in their loan agreement. Some loans have restrictions on how the funds can be used (such as for improvements or renovations), while others are unrestricted. These loans last until the borrower dies or moves, at which time they (or their heirs) can repay the loan, or the property can be sold to repay the lender. The borrower gets any money that remains after the loan is repaid.
Reverse Mortgage Eligibility
In order to qualify for a government-sponsored reverse mortgage, the youngest owner of a home being mortgaged must be at least 55 years old. Borrowers can only borrow against their primary residence and must also either own their property outright or have at least 50% equity with, at most, one primary lien—in other words, borrowers can’t have a second lien from something like a HELOC or a second mortgage. If the borrower doesn’t own their house outright, they usually have to pay off their existing mortgage with the funds received from a reverse mortgage.
Typically only certain types of properties qualify for government-backed reverse mortgages. Eligible properties include:
- Single-family homes
- Multi-unit properties with up to four units
- Manufactured homes built after June 1976
- Condos or townhomes
In the case of government-sponsored reverse mortgages, borrowers also are required to sit through an information session with an approved reverse mortgage counselor. They also have to stay current on property taxes and homeowner’s insurance and keep their property in good condition.
Types Of Reverse Mortgages
Most reverse mortgages are government-insured loans. Like other government loans, like USDA or FHA loans, these products have rules that conventional mortgages don’t have, because they’re government-insured. These include eligibility criteria, underwriting processes, funding options and, sometimes, restrictions on uses of funds. There are also private reverse mortgages, which do not have the same strict eligibility requirements or lending standards.
Single-Purpose Reverse Mortgage
Single-purpose loans are typically the least expensive type of reverse mortgage. These loans are provided by nonprofits and state and local governments for particular purposes, which are dictated by the lender. Loans may be provided for things like repairs or improvements. However, loans are only available in certain areas.
Home Equity Conversion Mortgage
Home equity conversion mortgages (HECMs) are backed by the U.S. Department of Housing and Urban Development and can be more expensive than conventional mortgages. However, loan funds can be used for just about anything. Borrowers can choose to get their money in several different ways, including a lump sum, fixed monthly payments, a line of credit or a combination of regular payments and line of credit.
Proprietary Reverse Mortgage
Proprietary reverse mortgages are private loans that aren’t backed by a government agency. Lenders set their own eligibility requirements, rates, fees, terms and underwriting process. These loans are typically the easiest to get and the fastest to fund.
Who A Reverse Mortgage Is Right For
A reverse mortgage may make sense for:
- Seniors who are encountering significant costs late in life
- People who have depleted most of their savings and have considerable equity in their primary residences
- People who don’t have heirs who care to inherit their home
Contact us if you are looking into a Reverse Mortgage. Our Loan Officers are experts and can provide additional resources.