A reverse mortgage is any type of loan where a) money is borrowed, b) a lien is placed on the property and c) payments are deferred until the property is sold, refinanced or the lien is paid for in cash.
There are several types of reverse mortgages available. The three main types of reverse mortgages are as follows; the third of which is the main focus of this site.
Types of Reverse Mortgage
Single Purpose – These reverse mortgage loans are typically offered through government agencies on a city, county or state level and are used for a single purpose. These single purpose loans typically fall within the realm of deferment of property taxes, increasing energy efficiency of a home or foreclosure
assistance. They are usually income-based and need- based loans.
Proprietary Reverse Mortgage – These are any reverse mortgages offered that are similar to the FHA insured reverse mortgage but are not FHA insured. There are currently several proprietary loans on the market to choose from. Typically these types of loans come with higher interest rates and smaller amounts can be borrowed. This is because the lenders are at a greater risk of loss because they do not have the protection that comes with an FHA insured loan.
Home Equity Conversion Mortgage (HECM) – This is what most people are referring to when they talk about reverse mortgages. It’s what the commercials you see on TV and hear on the radio are advertising. This loan product is regulated by US Housing and Urban Development, “HUD,” and insured by the Federal Housing Administration,“FHA.” It is for borrowers that are 62 or older to either purchase or refinance a home.
Why is it Called a Reverse Mortgage?
If you think about it, reverse mortgage is a great name for this mortgage product as it aptly explains what this loan is about. It is the reverse of getting a regular mortgage. Plus, it’s much less of a mouthful than Home Equity Conversion Mortgage and HECM sounds like you have something stuck in your throat.
Aside from the loan process, everything is in reverse.
Instead of making payments to the lender and depending on the HECM option you choose, you can receive monthly distributions from your mortgage instead of being required to make monthly mortgage payments.
Instead of your loan balance going down over time your loan balance increases, assuming you do not make payments.
Fees for the loan are based on the appraised value, up to a $679,650 appraised amount, instead of the loan amount.
And until recently, it was the home that needed to qualify, not the borrower.
Reverse Mortgage Basics
We will cover the following in more depth throughout the site but here are the basics of a reverse mortgage.
The reverse mortgage is an amazing financial tool that comes with a variety of safety features for the borrowers. It can be used for a variety of situations and can be structured numerous ways to meet the needs of the borrower.
The HECM (Home Equity Conversion Mortgage) or reverse mortgage, is for seniors that are 62 or older. While spouses younger than 62 are not eligible as borrowers, they are considered “non-borrowing spouses.” Eligible non-borrowing spouses are given certain protections should they survive the eligible borrower. Eligible spouses under the age of 62, at the time of application, are allowed to defer the sale of the home and remain in the home if certain requirements are met.
There are no monthly mortgage loan payments required with this loan. The interest and mortgage insurance are deferred and are added to the loan balance on a monthly basis. The loan balance grows over time because of these deferred payments.
However,should you choose to do so, you can make payments. While there are no monthly payments required, you must continue to pay property taxes, homeowner’s insurance and other home ownership costs.
There are no mortgage payments due until any of the following happen: the property is sold, interest is transferred or the last surviving borrower permanently moves out of the home for more than 12 months, or there is no eligible surviving spouse to maintain the property as their principal residence.
Technically your loan balance could exceed the homes value at some time in the future. This is a non-recourse loan. This means that when your home is sold to repay the loan, neither you nor your family will be required to pay more than the sales price of the home. The insurance will pay for any shortfall, so long as your home sells for at least 95 percent of the current appraised value.
If you or your family sells the home for more than what is owed. You or your family will net any proceeds from the sale that were beyond what was owed, less any real estate agent and title/escrow fees.
The loan is active for as long as you live in the home. There are no balloon payments or pre-payment penalties. It is unlikely that you will out live the term of the loan as its due date is 80 years.
You must continue to pay taxes, homeowner’s insurance, HOA dues (if applicable) and flood insurance (if applicable). You must maintain the property and use it as your principal residence.
You can payoff the reverse mortgage at any time either through a refinance or with cash. You can sell the home at anytime as well.
As long as you are following the terms in your mortgage agreement, the bank can never take your home. This is true regardless of what home prices do or how much you owe.
There is some qualifying for the program. Credit, mortgage/rent, tax and insurance payment history will be looked at. There are also disposable income requirements based on household size. Qualifying for these loans is significantly easier than a traditional mortgage.
When you pass away, the home goes to the estate (not the bank). Your death triggers the loan payoff, but the estate can then decide what they want to do with the home, sell it or keep it and payoff the loan.
If your heirs want to keep the home when you pass away (or move out permanently) instead of selling it, they will have to pay off the loan. But they won’t have to pay more than the home is worth. If the loan balance is more than your home is worth, they will only have to pay 95 percent of the current appraised value of your home. The FHA insurance will cover the rest. (If the loan balance is less than the value of your home, they will only have to pay the loan balance).
Without the government, the Home Equity Conversion Mortgage or HECM would not even exist in its present form today. Since the loan is regulated by HUD and insured through FHA, the combination created something that the free banking market never could. It created a loan with lower rates, more favorable terms and significantly lower risks to both the lender and borrower.
To understand what I am talking about, think about the massive risks associated with a reverse mortgage to both the borrower and the lender. There is a potential that the loan balance could greatly exceed the value of the home which puts both the lender and borrower in a situation that could create a significant loss for both.
Without the government’s insurance program, lenders would have to charge significantly higher interest rates and significantly reduce the amount of money someone could borrow to make up for the loans they lost money on.
Because FHA insures these loans, the lender is protected against a loss should the loan exceed the value of the home. The borrower is protected by FHA in two different ways.
First, the loan is non-recourse which means they are not personally liable for the loan and the lender cannot pursue them for any losses.
Secondly, it guarantees the borrower access to their funds, assuming they are following the terms of the mortgage, even if the lender went out of business.
Finally, because of this insurance, borrowers reap the benefit of lower interest rates and larger amounts of equity they can borrow.