A reverse mortgage program involves a loan that uses your home as collateral and doesn’t require a monthly principal or interest payment. A reverse mortgage allows you to access the home’s equity without taking on 15 or 30-years’ worth of mortgage payments. The interest that you accrue on a monthly basis is deferred and will be repaid when you sell the home, no longer occupy it as your primary residence, or pass away.
This type of mortgage is referred to as “reverse” because the payment stream is often reversed. With a regular mortgage or a home equity loan, you make monthly payments to a lender. As long as the loan is outstanding, you own your home.
How Can I Use a Reverse Mortgage Loan?
The original intention for the reverse mortgage was to assist homeowners age 62 or older with their daily living expenses. However, this is not the only way that you can use your reverse mortgage. Just a few of the most popular options include:
- Eliminating an existing mortgage
- Making home repairs and modifications
- Paying off existing debts (i.e. credit card, car loan)
- Paying medical bills, long-term health care, and prescription drugs
- Splurging on luxury items (i.e. vacations, high end furniture)
- Planning an estate in order to leave money to heirs
- Extending retirement assets
If your home is in need of mandatory physical repairs (i.e. major plumbing work, a new roof) in order to qualify for a reverse mortgage, part of the funds will be set aside for this purpose.
Reverse Mortgage Program Eligibility Requirements
You must meet the following criteria to qualify for a reverse mortgage:
- Age. You must be 62 years or older at the time of closing. If you are 62 but have a spouse who is under 62, you must discuss this scenario with us in order to understand the consequences that would occur in the event that your spouse outlives you.
- Residence. You must own a single family residence, FHA approved condominium, townhouse, manufactured home (click for requirements), or up to four unit property as your primary residence. Mobile homes without a permanent foundation do not qualify for reverse mortgage financing.
- Equity. You must have equity in your property. There is no static percentage of equity versus debt figure. However, you must have a minimum of 35 percent equity or more, depending on your age.
What Are the Types of Reverse Mortgages?
The most common reverse mortgage in the United States is the Home Equity Conversion Mortgage (HECM). The government insures and regulates this mortgage, but it is not a government loan. A private bank issues the loan and then the Federal Housing Administration (FHA) insures it. The borrower is charged an annual insurance fee of 1/2 percent of the loan balance. The loan balance then increases by the amount of this fee. The insurance protects the borrower under the following circumstances:
- If a lender goes out of business or otherwise misses a payment
- If the value of the home upon selling is inadequate for covering the remaining loan balance, the government insurance fund pays off the balance
Just as there are fixed rate and adjustable rates for regular mortgages, there are fixed and adjustable rates for reverse mortgages. Currently you must take a lump sum at closing with a fixed rate reverse mortgage. With an adjustable rate reverse mortgage, you can opt to take a lump sum, line of credit, monthly payments, or a combination of any of the preceding options.
The Process for Obtaining a Reverse Home Mortgage
For most states, we recommend that you complete the process as follows:
- Loan application. We will work up an application for you after you have provided your basic information for us online or over the phone. Once you have signed the application and provided the required documents, you’re ready to move onto counseling. Keep in mind some states require the counseling first.
- HUD approved counseling. There are both local and national agencies that can provide over the phone or in person counseling, depending on your location and personal preference. As soon as you have received a copy of your certificate in the mail, sign and date it and mail it to us. When we receive it, we can move onto the appraisal.
- Appraisal. We place the order for the appraisal. The appraiser will contact you to set up the appointment. Expect to pay the appraisal management company via credit card or eCheck. Once we have the completed appraisal, we will send you a copy along with your updated loan information.
- Closing. We will schedule the closing at your home or at the title company’s office at a time that works best for you. You must have proper identification and a voided check on hand at the closing.
How Long Does it Take to Close a Reverse Mortgage?
The biggest factor for the length of time is whether or not you’ve already been through the counseling session. If you complete counseling prior to applying for a reverse mortgage, you can close within three to four weeks. If you apply for a mortgage before you receive counseling, the process can take up to five or six weeks. Remember that some states require the counseling to be done first.