These FAQs are not from HUD or FHA and have not been approved by HUD, FHA or the U.S. government.
WHAT IS A REVERSE MORTGAGE?
A reverse mortgage is a unique loan that allows homeowner(s) 55 years of age and older to draw on the equity in their home, which is paid to the homeowner(s) in a variety of payout options. One aspect of this loan is that it does not require monthly mortgage payments to pay it back, until the homeowner(s) no longer reside in the residence as their primary home, or the last surviving borrower passes away or is in a health facility for more then 12 consecutive months. A primary residence is defined as living in the home for at least 6 months and 1 day each calendar year. FHA HECM reverse mortgages have a minimum age of 62 and other non-FHA reverse mortgages have a minimum age of 55 to age qualifying. Each loan has their own set of rules, loan fee structures and guidelines. We do both types of loans and can explain the differences for you. Income qualifying for a reverse mortgage is much different than the conventional loan income qualification process. The reverse mortgage since a monthly mortgage payment isn’t required, has much more flexibility when it comes to income qualifying.
HOW DO I QUALIFY FOR A REVERSE MORTGAGE?
To become eligible for a reverse mortgage, you must be at least 55 years old and own your home. You must have enough equity in the house to pay off any outstanding mortgage balances have ample equity remaining, and your home must be your primary residence. All applicants are subject to a financial assessment to determine their financial capacity and willingness to pay obligations as part of the qualification process. Your home must qualify by not having health and safety issues. If you have any questions, please feel free to contact me for details on this item.
HOW MUCH MONEY CAN I GET?
The amount of money that a lender will loan depends on the age of the youngest borrower, how much your house is worth, the total amount of liens, prevailing interest rates, your property tax and homeowner’s insurance payment history and in some lender cases, your credit score, although not all programs require a minimum score. The payoff of your existing mortgage and mandatory obligations along with the payment option chosen will affect the amount of money you will receive whether it be a line of credit or a one – time lump sum.
HUD limits borrowers to using 60% on the FHA HECM reverse mortgage, of the available money (after closing costs & fees) in the first year. The remaining funds are accessible beginning year two. This maximum disbursement limit set by HUD allows for the GREATER of:
- 60% of the Principal Limit (amount of money available to the borrower in all years of the loan) in the first twelve months of the loan from your closing date OR…
- The sum of Mandatory Obligations* (existing mortgage payoff, tax liens, closing costs, mortgage insurance premium) plus 10% of the Principal Limit. This total cannot exceed the total the Principal Limit at the time of loan closing.
Non-FHA HECM reverse mortgage loans do not have the 60% cap on what you can borrow the first year, their rules are different.
HOW DO I RECEIVE MY MONEY?
There are several different options to choose from. You can take the money in a lump sum (up to HUD’s first-year maximum withdrawal), set up a line of credit, a monthly stipend, or a combination of all three. In the first year, the line of credit or monthly tenure payments or monthly payments cannot exceed 60% of the Principal Limit (loan amount). After the first year, the balance of the available line of credit or tenure/monthly payments will be accessible.
Non-FHA HECM reverse mortgages again do not have the maximum 60% rule mentioned above, a full advance at closing is possible.
WHAT COSTS ARE ASSOCIATED WITH A REVERSE MORTGAGE?
The fees and cost of a reverse mortgage are based on a number of items. For example, an origination fee may be paid to the broker/lender, a MIP (mortgage insurance premium) is paid to FHA on the Home Equity Conversion Mortgage (HECM), an appraisal fee, a flood certification fee, a document preparation fee, title, settlement, and escrow fees. All costs are clearly shown on the Good Faith Estimate (GFE). Monthly servicing fees could apply. Non-FHA HECM reverse mortgages do not have FHA MIP on their loans, and for this reason the closing costs on these loans are less.
WHAT ARE THE FHA MORTGAGE INSURANCE PREMIUM CHARGES?
The upfront Mortgage Insurance Premium (MIP) is calculated at 2.0% of your home’s appraised value or a maximum of $970,800 (the national lending limit cap). For example, a home appraised at $275,000 would have a one-time upfront FHA insurance premium of $5,500. The ongoing FHA insurance premiums are .5% (one-half of one percent) of each month’s calculated outstanding loan balance.
Non-FHA HECM reverse mortgages do not require FHA MIP and are lower in closing costs.
IS IT REQUIRED THAT I RECEIVE COUNSELING BEFORE GETTING A REVERSE MORTGAGE?
Yes. Counseling is required with an independent third-party HUD-approved counselor, for all reverse mortgages, to protect borrowers from receiving incorrect information about reverse mortgages. The lender must be in receipt of the counseling certificate before a loan application can be submitted to an underwriter. To locate a reverse mortgage counselor near you, contact your loan originator or your local HUD office.
DO I GET TAXED ON THE MONEY I RECEIVE FROM MY REVERSE MORTGAGE?
While the proceeds you receive from a reverse mortgage are typically not subject to individual income taxation, due to the fact the funds were not earned. To be safe, you can consult your tax advisor.
DO I HAVE TO PAY ANY FEES TO THE REVERSE MORTGAGE LENDER DURING THE COURSE OF MY LOAN?
A reverse mortgage was created so borrowers don’t have to pay monthly mortgage payments or accrued interest during the course of the loan. Typical upfront costs are for the appraisal(s) and HUD-approved reverse mortgage counseling. However, there may be a monthly servicing fee associated with non-FHA HECM reverse mortgages (which will be financed and added to the loan balance if not paid). HECM reverse mortgages in addition to the upfront 2% MIP collected, will have monthly MIP costs as well equal which is calculated by taking .50% multiplied by the outstanding balance divided by 12 months. If not paid, it gets added to the mortgage balance on a monthly basis and gets paid once the property sells or the loan gets refinanced.
DOES THE BANK OWN MY HOME?
No. You the homeowner owns the home, just like a normal real estate loan.
DOES THE BANK GET ALL THE EQUITY ON MY HOME WHEN THE HOME SELLS?
No. You or your heirs are entitled to the equity, not the bank. But back in the 1970’s, the bank did get the equity. But the rules changed many years ago, which can cause some confusion.
IF I HAVE AN EXISTING MORTGAGE LOAN ON MY HOME CAN I GET A REVERSE MORTGAGE?
Yes. Many borrowers use a reverse to pay off their existing mortgage and eliminate their monthly mortgage payment. In many cases, there is a line of credit left over for the borrower to use at their discretion.
ARE THERE ANY RESTRICTIONS ON HOW I CAN USE THE REVERSE MORTGAGE FUNDS?
At the time the reverse mortgage is funding, using funds to invest in the stock market isn’t allowed. However, after the loan funds, you are free to use the remaining funds however you wish.
DO I NEED TO BE SUFFEREING A HARDSHIP TO QUALIFY?
No. The reverse mortgage has become a Swiss Army Knife financial tool for people of all financial backgrounds, including the mass affluent.
IT SOUNDS TOO GOOD TO BE TRUE-IS IT?
No. The reverse mortgage doesn’t require any monthly mortgage payments to be made to pay back the money. The trade – off is that the accrued monthly interest, if not paid, gets tacked on to the balance of your loan and gets paid back once the home is sold or the loan is refinanced.
WHAT HAPPENS IF I OWE MORE ON THE REVERSE MORTGAGE THAN THE HOME IS WORTH WHEN IT COMES TIME TO PAYOFF THE LOAN?
Reverse mortgages are non-recourse loans which simply means the bank can’t come after you or your heirs if there isn’t enough equity to pay off the loan balance.
ARE ALL REVERSE MORTGAGES FHA HECM LOANS?
No. There are now non-FHA HECM loans that have different lending guidelines. It’s important that you understand the differences between the loans and how it affects your unique situation.
CAN I MAKE MONTHLY MORTGAGE PAYMENTS ON A REVERSE MORTGAGE?
Yes. You can make any amount of a monthly mortgage payment and as often as you like on a reverse mortgage. The payment will go toward paying down the balance of the loan.
CAN I BUY INVESTMENT PROPERTY WITH A REVERSE MORTGAGE?
The reverse mortgage loan must be placed on your primary residence. You can take the funds and purchase an investment property just as long as you continue to live in your primary home for at least 6 months and 1 day per calendar year.
CAN I RENT OUT MY HOME AFTER I GET THE REVERSE MORTGAGE?
No. The home in which the reverse mortgage was placed must remain your primary residence. However, you can rent out rooms, as long as you remain in the property.
IF I HAVE A SPOUSE YOUNGER THAN 62 YEARS OF AGE ON AN FHA HECM LOAN AND I DIE WHAT HAPPENS TO MY YOUNGER SPOUSE?
On an FHA HECM reverse mortgage, as long as the lender knew at the time of application you had a younger spouse, and you pass away, the younger spouse can stay in the property for the rest of their life and not have to make mortgage payments. The younger spouse would not get access to any left – over reverse mortgage funds that may be available on the credit line option. The younger spouse must report the death of their spouse to qualify for the deferral and remain in the property as her primary residence.
Non-FHA reverse mortgages do not have the same rules for younger spouses. The younger spouse on this type of loan does not have the right to stay in the property as of 2022.
DO I HAVE TO BE AGE 62 TO QUALIFY FOR A REVERSE MORTGAGE?
No. There are now reverse mortgages available for people over the age of 55.
IF I AM IN A FACILITY CAN THE LENDER TAKE MY HOME?
If you are in a facility and are out of your home for 12 consecutive months, the loan needs to be paid off. However, the emphasis is on consecutive months.
CAN I LIVE ABROAD OR WITH RELATIVES FOR LONG PERIODS OF TIME WITHOUT HAVING TO PAYOFF THE REVERSE MORTGAGE?
Yes. As long as you live in your home for at least 6 months and 1 day for each calendar year, that is ok.
CAN THE LENDER FORECLOSE ON MY HOME IF I DON’T PAY MY PROPERTY TAXES?
As with any real estate loan, since property taxes are the senior lien on the land, and property taxes go unpaid, that makes a lender nervous. The county can foreclose without notice to the lender, collect the delinquent taxes and keep the equity and not give the lender a dime, the lender loses their entire balance. So yes, if taxes go unpaid, a lender can foreclose for long periods of unpaid property taxes. However as of 2015, lenders at the time of application, lenders are checking property tax payment histories. If property taxes were willfully not paid, the lender will run an algorithm on the youngest borrower’s life expectancy and collect that number of years of property taxes and roll it into the loan and pay the taxes as they become due. If you outlive your projected life expectancy, then the burden of payment of property taxes goes back to the homeowner. Some non-FHA reverse mortgage loans do not have this property tax collection feature.
WHAT IF ONE OF MY CHILDREN MOVES IN WITH ME AND SERVES AS MY CAREGIVER, WHAT HAPPENS WHEN I PASS AWAY, CAN MY CHILD STAY IN THE HOME?
If your child is at least 55 years of age and there is enough equity remaining in the property, they may be able to qualify for their own reverse mortgage to pay off an existing reverse mortgage on the property. If they cannot qualify for their own reverse mortgage or a conventional loan to pay off the existing reverse mortgage, then unfortunately, the property must be sold.
WHY IS A REVERSE MORTGAGE EASIER TO QUALIFY FOR THAN A HELOC OR A CONVENTIONAL LOAN?
The reverse mortgage does not use debt to income ratios for income qualifying as a HELOC or Conventional loan does. A mortgage payment isn’t calculated and included as a debt like those loans, since a monthly mortgage payment isn’t required. So right away income qualifying becomes easier. Reverse mortgages use residual income for qualifying. You have to have some money left over after paying projected utility payments, credit related payments and property taxes and homeowner insurance. The amount of residual income varies on your state and county, and how many people will be in the home.
CAN I BUY A HOME WITH A REVERSE MORTGAGE?
Yes. it’s basically a large down payment 50-60%, and then no payments on the balance. Jumbo loan amounts are available.
DOES A REVERSE MORTGAGE AFFECT MY SOCIAL SECURITY OR MEDICARE BENEFITS?
Generally, no, since a reverse mortgage is not money you earned, it’s leveraged money. But with tax laws periodically changing, it’s a good idea to call your income tax preparer for guidance on this.
MY CPA OR FINANCIAL ADVISOR DON’T RECOMMEND REVERSE MORTGAGES, WHY?
To some CPA’s and Financial Advisors, it doesn’t make sense to borrow money during retirement, it’s not conventional wisdom. In the 1970’s thru the 2000’s the reverse mortgage was not a very good loan, and was problematic. Since 2010 several program updates and improved guideline changes have taken place that people are not aware of, including CPA’s and Financial Advisors. Older loans on the books prior to 2015, under the old rules, may still be problematic in the future. These older loans may not have enough equity to refinance into the newer loan for the additional protections. Some Financial Advisors typically offer products they are licensed to sell, and can’t recommend anything else. Other Financial Advisors who have taken additional education have been exposed to reverse mortgages, typically RIA advisors, are more open to reverse mortgages. But still many Realtors, CPA’s and Financial Advisors have not taken the time to educate themselves on the newer guidelines, they instead rely on old data.
If there is an additional question you have that’s not addressed here, feel free to write it below in the contact form and I will answer it for you.
These are just a few of the common most frequently asked questions I get on reverse mortgages. If you have an additional question let me know below!
Best,
KW