REVERSE MORTGAGES 101
In this article we will look at the Reverse Mortgage basic structure and guidelines. Then we will take a look at the Reverse Mortgage product specifics. Finally, we will take a closer look at additional guidelines that apply to Reverse Mortgages.
Basically, a Reverse Mortgage is a home loan that provides seniors 62 years or older the opportunity to convert part of the equity in their home into proceeds that they can use for various life expenses, or however they choose.
One of the many misconceptions is that a Reverse Mortgage is some type of government assistance program. This is not true. A Reverse Mortgage is simply another kind of mortgage.
To further clarify, a Reverse Mortgage is the elimination of a monthly mortgage payment. When a borrower has equity in their home, a Reverse Mortgage allows them to borrow from this equity without having a new monthly mortgage payment. As time passes their mortgage balance increases. Reverse Mortgages are also known as HECM Loans. This stands for Home Equity Conversion Mortgage. These loans are insured by the Federal Housing Administration, or FHA, and are part of the US Department of Housing and Urban Development. This means all Reverse Mortgages must follow HUD guidelines. They must also comply to FHA guidelines. This insurance is a very important feature of the program. No matter what happens with their lender, the borrower will continue to receive payments from the Reverse Mortgage loan.
The division of the US Department of Housing and Urban Development, HUD, and FHA do not fund loans but rather act as the Insurance Agency for banks who originated loans that follow the FHA standards. The HECM is the only Reverse Mortgage product insured by FHA.
The qualifying age for a Reverse Mortgage is 62 years or older. Keep in mind that spouses who are under 62 years old may remain on the title of the home. Further, Reverse Mortgages can only be done on primary residences and the property must meet HUD guidelines. It is important to know that the borrower does not lose ownership of their home if they decide to get a Reverse Mortgage. The lender does not decide how the borrower’s loan proceeds can be used, and there is no prepayment penalty on these loans. Borrowers must have enough equity in their home to pay off any existing liens such as an existing mortgage.
Criteria used to determine how much a borrower can borrow includes:
- The age of the youngest borrower or eligible non-borrowing spouse
- The Maximum Claim Amount, or MCA. This is the lesser of the FHA lending limit or the property value
- The expected interest rate