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What Is a Reverse Mortgage?

A reverse mortgage is a first mortgage loan that can be used to pay off an existing mortgage, get cash out, or set up a line of credit for future draws. The main differentiator between it and a regular mortgage is that no principal or interest payment is required while you live in the home and stay current on the property charges.  The interest, and potentially mortgage insurance, 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.

Uses of a Reverse Mortgage

The original intention for the reverse mortgage was to assist homeowners age 62 or older with their daily living expenses by supplementing their income. However, this is not the only way that you can use a reverse mortgage. Some 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 or for in home health care
  • Assistance in paying for property taxes and insurance
  • Planning an estate in order to leave money to heirs
  • Extending retirement assets (drawing from home equity during times when the market is down)
  • Buying a new home

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 to be eligible for the FHA HECM product. 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.  Proprietary products can vary in minimum age by state law and have gone as low as 55 years old in the past.

Residence – You must own a single family residence, FHA approved condominium, townhouse, manufactured home, or up to four unit property as your primary residence. Mobile homes and condominiums have very specific rules for qualification. 

Equity – You must have equity in your property. There is no standard percentage of equity versus debt figure, but a rough estimate would be at least 50% equity in your property.The older you are the more you can borrow via a reverse mortgage, and interest rates at the time of taking out the loan impact how much you can borrow.

The Process for Obtaining a Reverse Mortgage

For most states, we recommend that you complete the process as follows:

Prequalification – If you are comfortable with the proposal you were sent, and your questions have been answered, it is time to have your credit report pulled and to get prequalified.That is when we determine if you have the credit, income, & property charge payment history to take out the loan.

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. Telephone counseling is most common and that is when an unbiased person will review the program with you to make sure you understand it.  The session is mandatory for all types of reverse mortgages.

Loan Application – We will work up an application for you after you have provided your basic information for us over the phone or by mail/email. Once you have signed or e-signed the application and provided the required documents, we can begin processing your loan.

Processing – We place the order for services like the appraisal, title work, and flood certification. The appraiser will contact you to set up the appointment. Expect to pay the appraisal management company via credit card. Once we have the completed appraisal, we will send you a copy along with your updated loan terms.

Underwriting – During this part of the process, the risk averse underwriter will look for reasons why the lender should have concerns.  If there are any, they must be addressed prior to being cleared for closing.Generally this person is looking for red flags or reasons why a borrower might not meet the loan guidelines. 

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 is recommended to receive your funds via bank wire.  Some states require attorneys and others require a notary to oversee the closing.

Funding – On the fourth business day after closing, the title company will wire your funds to you. Sundays and holidays are excluded from the three rescission days that you are given to review what you signed before the transaction becomes final.

Funding – On the fourth business day after closing, the title company will wire your funds to you. Sundays and holidays are excluded from the three rescission days that you are given to review what you signed before the transaction becomes final.