Reverse Mortgages

 

Frequently Asked Questions: 
Note:  These materials are not from HUD or FHA and were not approved by HUD or a government agency.”
1. What is a reverse mortgage?
A reverse mortgage is a loan that enables senior homeowners, age 62 and older, to convert part of their home equity into cash – without having to sell their home, give up title to it, or make monthly mortgage payments. Borrowers must continue to pay property taxes, homeowner’s insurance, applicable condominium or HOA dues, maintain the home and otherwise comply with the loan terms. The loan generally becomes due when the last remaining borrower or eligible non-borrowing spouse permanently leaves the home. However, certain events may cause the loan to become due and payable, such as failing to comply with the terms of the loan.
** Consult Tax Advisor. Note that not all products are available in all states.

2. How does a reverse mortgage differ from a home equity loan?

Both a reverse mortgage and a home equity loan use the equity you have built up in your home to provide you with readily available cash.

They differ in that with a home equity loan you must make regular monthly payments of principal and interest. However, with a reverse mortgage you do not make any monthly mortgage payments for as long as you stay in the home and comply with the loan terms.

Q. Can my current income influence my ability to get a reverse mortgage?
A. Yes.  Please note that due to new regulations (see e.g. ML 2014-21 and ML 2014-22) mortgage loan originators are required to perform a thorough financial assessment of prospective borrower.  However, reverse mortgage borrowers need not make month repayments of principal and interest so long as they comply with the loan terms.


3. What are the advantages of a reverse mortgage?

There are many. Here are a few of the most significant:

–  You remain independent. A reverse mortgage allows you to remain in your home and retain home ownership so long as you continue to comply with all loan terms.
–  No monthly mortgage payments. You need not pay back the reverse mortgage loan nor make any monthly mortgage payments until you permanently move out of the home.
–  Loan proceeds are not taxable. Because the money you receive from a reverse mortgage is not considered income, it will not affect your Social Security or Medicare benefits.  However, certain benefits, such as SSI and Medicaid can be impacted.  You must also continue to pay property taxes, homeowner’s insurance, maintenance costs and monthly HOA or condominium dues, if applicable.

– Freedom and flexibility.  The money you get from a reverse mortgage is yours to use in any way you choose. ** Consult Your Tax Advisor

Q. I’ve heard that with a reverse mortgage the lender would own my home. Is this true?
A. It’s absolutely false. The borrower retains title to the property. The reverse mortgage lender is merely extending a loan to the borrower.  Because the homeowners retain the title, they remain responsible for the payment of property taxes, insurance, utilities, home maintenance and other expenses – just as they would with a standard first mortgage or home equity loan.
Q.  Can I refinance a reverse mortgage, as I would be able to do with a traditional home mortgage? 
A. Yes.  Refinancing can make sense if your home increases in value or interest rates drop.
Q. Is it possible for my loan balance to become greater than the value of my home?
A. Yes, however, you can never owe more than what your home is worth. What’s more, since the reverse mortgage is what is known as a “non-recourse” loan, the lender cannot seek repayment from your income, your other assets, or your estate. In other words, the house stands for the debt.
Q. Can a reverse mortgage lender take my home away if I outlive the loan?
A. No they cannot.  And the loan is not due at that time either.  In fact, you don’t need to repay the loan as long as you or another borrower continues to live in the house and keep the taxes paid, insurance in force, maintain the property and comply with the loan terms.


4. How much money can I get? How do you determine the amount of cash I am eligible for?

The amount you can borrow depends on several factors, including the age of the youngest borrower or eligible non-borrowing spouse, the type of reverse mortgage you select, current interest rates, the location of your home, and the appraised value of your home and FHA’s national HECM lending limit. In most cases, the older you are, the more valuable your home, and the less you owe on it, the more money you can get.

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5.  How can I use the money I get from a reverse mortgage?  Are there any limits on how I use the money?  

You can use the money for anything you choose, from daily living expenses, home improvements, healthcare expenses, pay off larger expenses, or simply enhancing your retirement years. For many people, the money provides a “financial security blanket,” in case unexpected expenses arise.


6. In what ways can I receive the money from a reverse mortgage?  Is there a choice in how I receive the cash?

Most definitely. With most reverse mortgages you have a wide range of payment options, one of which should be ideal to meet your financial needs.

You can choose to receive the money all at once, as a lump sum.

You can receive equal monthly payments as long as one of the borrowers lives and continues to occupy the property as a principal residence.

You can choose to receive equal monthly payments for a fixed period of months.

You can get a line of credit; which allows you to take funds at times and in amounts of your choosing until the line of credit is exhausted.  This is the most popular option.

You can opt for a combination of line of credit with monthly payments for as long as the borrower remains in the home.

Or, finally, you can choose a combination of the above


7. What requirements or restrictions are involved in the reverse mortgage process?  Who can qualify?

Seniors 62 years of age or older qualify. Please note that due to new regulations (see e.g. ML 2014-21 and ML 2014-22) mortgage loan originators are required to perform a thorough financial assessment of prospective borrowers.

Q. I still owe money on a first or second mortgage. Can I still get a reverse mortgage?
A. Yes. You may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage. The funds you would receive in the reverse mortgage would be used to pay off whatever existing mortgages you have on the property.

Q. Can I get a reverse mortgage on a second home or resort property I own?
A. Unfortunately no. Reverse mortgages may only be taken out on your primary residence.

Q. What kinds of homes are eligible for a reverse mortgage?
A. First and foremost, the reverse mortgage must be on the borrower(s) primary residence, that is, where they live most of the year. Most reverse mortgages are taken on single family, one-unit homes or FHA-Approved condominiums. Two-to-four unit buildings that are owner-occupied are also normally acceptable. Some lenders grant reverse mortgages on manufactured homes built after June 1976. Mobile homes and cooperatives are generally not eligible for a reverse mortgage.

Q. Would a home that is in a “living trust” be eligible for a reverse mortgage?
A. Yes. In most cases a homeowner who has put his or her home in a living trust can usually take out a reserve mortgage.  A review of the trust documents would be made by the title company and the reverse mortgage lender to determine if anything in the living trust would be unacceptable.

Q. What are the main differences between a FHA-Insured HECM reverse mortgage and a proprietary product? 

A.  In general, the HECM product may offer a higher loan amount for a lower valued home (for example, under $500,000) depending upon the loan amount caps in specific counties/MSA, the amount of equity in the home, and age of youngest borrower or eligible non-borrowing spouse.  For a higher valued home with significant equity, a senior may be likely to qualify for a larger cash payout thru a proprietary non-FHA Insured reverse mortgage.  These proprietary plans are not currently available in all states.


8.  What kinds of reverse mortgages are available? Are all reverse mortgages the same?

No, actually there are two basic types of reverse mortgages:

1.     Federally-insured reverse mortgage. Known as Home Equity Conversion mortgages(HECM), they are insured by the Federal Housing Administration (FHA).  They are widely available and can be used for any purpose.

2.     Proprietary reserve mortgages.  These are private loans with unique features that appeal to certain kinds of borrowers.  Not all reverse mortgage lenders offer this proprietary product.

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9. When must a reverse mortgage loan be repaid ? When will I have to pay the principal and interest costs of this loan ? 

Generally, your reverse mortgage loan becomes due and must be paid in full when one or more of the following conditions occurs: (a) the last surviving borrower or eligible non-borrowing spouse passes away or sells the home; (b) all borrowers permanently move out of the home; (c) the last surviving borrower or eligible non-borrowing spouse fails to live in the home for 12 consecutive months due to physical or mental illness; (d) you fail to pay property taxes or insurance; (e) you let the property deteriorate, beyond what is considered reasonable wear and tear, and do not correct the problems.


10. What is owed when a reverse mortgage loan is repaid? What has to be repaid when the loan becomes due?

When the last surviving borrower permanently moves out of the home or dies, the reverse mortgage loan becomes due.  The reverse mortgage principal, interest charges, and service fees (such as closing cost fees) are paid from sale of the house. 


11. How will a reverse mortgage affect my estate? Will I still have an estate that I can leave to my heirs?

When you as the borrower or eligible non-borrowing spouse sell your home or no longer use it for your primary residence, you or your estate must repay the lender for the cash received from the reverse mortgage, plus interest and service fees. Any remaining equity belongs to you or your heirs. It’s important to remember that you or your eligible non-borrowing spouse can never owe more than the home’s appraised value when it is sold. None of your other assets will be affected by your reverse mortgage loan.

Q. Must the heir or the last surviving borrower or eligible non-borrowing spouse sell the property to repay the reverse mortgage loan?

A.  No.  Repayment may be accomplished by refinancing the reverse mortgage with a tradition “forward” mortgage loan, or through the use of other assets.


12. What are the costs and fees? Other than repaying the principal and interest, what kinds of fees are involved in a reverse mortgage?

Most reverse mortgages have an application fee (which includes the credit report), an origination fee, closing costs (including but not limited to: flood cert, escrow, title, recording fees and attorney trust review, property taxes, hazard insurance, if applicable). These charges can be paid from the proceeds of the reverse mortgage.  However, the initial cost of independent counseling by a HUD approved agency and the appraisal costs will have to be paid out of pocket.  All other costs are added to the principal and paid with interest when the loan becomes due or fails to comply with the terms of the loan.

Q.  How much cash will I have to come up with to cover origination fees and other closing costs? 

A.  One of the many advantages of a reverse mortgage is that you can use the money you get from your home’s equity (dependent upon final calculations) to pay for the various fees that are part of the loan costs overall.  The costs (other than the counseling cert and appraisal) are simply added to your loan balance, and you pay them back, plus interest, when the loan becomes due – that is when the last surviving borrower or eligible non-borrowing spouse permanently moves out the of the home or passes away or fails to comply with the terms of the loan.

Q. Are reverse mortgage interest rates fixed or variable?
A. Most reverse mortgages extended to seniors to date have variable rates that are tied to a financial index and will vary according to market conditions. However, the fixed rate loan is available and can be another option for the senior homeowner.
Q. What is “TALC” and why should I know about it?
A. TALC is short for “Total Annual Loan Cost.” It combines all of the costs of a reverse mortgage into a single annual average rate and can be very useful when comparing one type of reverse mortgage to another.Reverse mortgages vary considerably in features and costs. It’s not always easy to compare “apples to apples.” If you are considering a reverse mortgage, be sure to ask the lender or counselor to explain the TALC rates for the various reverse mortgage products.


13. Are there tax consequences? What about my Social Security and Medicare benefits?

A. Because reverse mortgages are considered loan advances and not income, the IRS considers them to be not taxable. Similarly, having a reverse mortgage should not affect your Social Security or Medicare benefits.  If you receive SSI, Medicaid, or other public assistance, your reverse mortgage loan advances are only counted as “liquid assets” if you keep them in an account past the end of the calendar month in which you receive them. You must be careful not to let your total liquid assets become greater than these programs allow. It may be wise to consult your tax advisor on this.

Another tax fact to bear in mind: interest on reverse mortgages is not deductible on your income tax returns until the loan is paid off entirely. Consult with your tax advisor.
You should discuss the impact of a reverse mortgage on federal, state or local assistance programs with a professional advisor, such as your local Area Agency on Aging (toll-free at 1-800-677-1116), an independent reverse mortgage consultant(**), or a tax attorney.

** A list of approved counseling agencies is posted on the Internet by the U.S. Department of Housing and Urban Development, at www.hud.gov


14. What advice should I get before taking a reverse mortgage? I understand that I must meet with an unbiased counselor before completing my reverse mortgage application. What does that accomplish?

This is a federally mandated feature of the reverse mortgage process and is designed for your protection. The counselor, who is from an independent government-approved housing counseling agency, explains in detail the pro’s and con’s of all your reverse mortgage alternatives. He or she will discuss a reverse mortgage’s costs and financial implications, should tell you about any government or nonprofit programs for which you may qualify, and advise you on any proprietary reverse mortgages that may be available in your area.

Real Estate Broker – California Bureau of Real Estate  – Cal Bre License # 01144118
NMLS ID # 264381