A reverse mortgage is a loan against your home that requires no repayment for as long as you live there. It is insured by the FHA (Federal Housing Administration) for homeowners ages 62 or older. It is different from other types of loans because the borrower does not make loan payments during the loan.
According to the AARP’s 2006 survey, reverse mortgages are most often used to pay for medical and daily living expenses. Homeowners who have an existing mortgage also use the reverse mortgage to fully pay off the existing mortgage and stop making monthly payments.
A reverse mortgage is basically a loan that uses a home’s equity as collateral. The loan amount is a percentage of the property’s market value. That percentage is determined by the age of the homeowner based on life expectancy among other factors. The loan does not generally have to be repaid until 6 months after the last surviving homeowner moves out of the property or passes away. At that time, the estate typically sells the home to repay the balance of the reverse mortgage and the remaining equity is inherited. The estate is not personally liable for any additional mortgage debt if the home sells for less than the payoff amount of the reverse mortgage.
Reverse mortgage eligibility
To be eligible for a reverse mortgage, the FHA requires that all homeowners be 62 or older. If there is a mortgage on the home, it can be paid off with the proceeds of the reverse mortgage. Minimum income and credit score requirements are not considered in a reverse mortgage application.
Eligible homes
Almost all homes are eligible, however, some types of properties have restrictions (condominiums, mobile homes, and manufactured).
Reverse mortgages vs home equity loans
Home equity loans and traditional mortgages have strict requirements for income and creditworthiness because the homeowner must be able make payments to repay the loan. A reverse mortgage has no minimum income or credit requirements because the homeowner no longer makes monthly mortgage payments.
The amount that can be borrowed from a reverse mortgage is set by an FHA formula that use age, interest rates, principal limits and the appraised value of the property.
As noted previously, with traditional loans the homeowner is required to make monthly payments. With a reverse mortgage the loan is not generally due for repayment for as long as at least one homeowner lives in the home as a primary residence and maintain it. However, the homeowner must stay current on real estate taxes, insurance, and maintenance.
Time limits on reverse mortgages
Reverse mortgages can not be outlived. Generally, as long as one homeowner lives in the home (while staying current on taxes and insurance) then the loan is not due.
Inheritance
When the loan becomes due, the estate chooses to either repay the reverse mortgage or sell the home.
If the home sells for more than the balance of the reverse mortgage, the remaining equity passes to the heirs. If the home sells for less than the owed balance, the lender must take a loss and request reimbursement from the FHA.
A reverse mortgage is “non-recourse” meaning that no other assets are liable to repay it. For example, second homes, investments, and cash cannot be required from the estate to pay off the reverse mortgage.
Distribution of funds
The proceeds of a reverse mortgage can be distributed in any combination of:
- Line of Credit – draw as needed up to the maximum eligible amount
- Lump sum – a lump sum of cash disbursement
- Tenure – monthly payments for an unlimited number of years
- Term – monthly payments for a specific number of years
