Reverse mortgages are mortgage loans when a reverse mortgage lender will lend on a home for homeowners who are at least 62 years old where the homeowner has equity in their homes. The older a reverse mortgage loan borrower is, the more loan to value the lender will lend on. For example, if a homeowner is 62 years old, the loan to value may be 50% whereas if the homeowner is 75 years old, the loan to value may be 70% loan to value ( Please not these loan to value are not accurate figures and are used just for illustration purposes only ). The purpose for a reverse mortgage is for a homeowner not to make a mortgage payment as long as they stay and live in the home and as well as the reverse mortgage borrower is able to make the property tax and homeowners insurance payments. With reverse mortgages, the balance of the mortgage loan will keep on going up. If the homeowner lives to be over 100 years old, they still do not have to make a mortgage payment.
Traditional Mortgage Loans
Traditional mortgage loans are mortgage loans where mortgage loan borrowers need to qualify for a mortgage loan where the lender needs to review credit history, credit scores, income, job history, assets, and liabilities. Traditional mortgage loans are for home buyers purchasing a home or homeowners refinancing their current home loan for better mortgage rates and terms. After the borrower closes on his or her traditional mortgage loan, the borrower then is required to make the principal and interest payments on their mortgage loan until their mortgage loan term is up or they decide to pay off the balance of their mortgage loan. If the mortgage loan borrower does not make their scheduled monthly payments, the mortgage lender can start foreclosure proceeding and can foreclose on their home loan.
With reverse mortgages, the term of the loan is different. Reverse mortgages are only for homeowners who are at least 62 years old and who have equity in their homes. Seniors older than 62 years old who own their homes but do not have equity in their homes will not qualify for reverse mortgages. Seniors with equity in their homes can convert that equity to income or a line of credit. Reverse mortgages are for homeowners who intend in occupying their homes as their primary home.
Federal Housing Administration
The Federal Housing Administration, FHA, insures all reverse mortgages in the United States through their Home Equity Conversion Mortgage loan program, also referred as HECM. Reverse mortgage lenders is insured for all reverse mortgages they originate and fund by the Federal Housing Adminstration in the event of loss occured as long as they follow FHA lending guidelines on reverse mortgages. Reverse mortgage lenders are also guaranteed by FHA that they will be repaid in full in the event the home is sold.
The difference between a reverse mortgage and traditional mortgages are that reverse mortgages doesn’t require homeowners to make their monthly mortgage payments to their mortgage lender as long as they are alive and occupying the home. With reverse mortgages, the reverse mortgage loan proceeds are paid to the homeowner at the time of their refinance. The reverse mortgage loan borrower has several payout plans to choose from.
- Monthly payment plan where the reverse mortgage loan borrower gets a monthly payment instead a one lump sum.
- A line of credit, or
- Lump sum (with a HECM, you are limited to 60% of the loan amount during the first year after closing in most cases).
Reverse mortgage loan borrowers can also elect to get a combination of monthly installments and a line of credit.
Proceeds from reverse mortgages are tax free and the borrower can use it any way they want. They can use it for remodeling their homes, purchase a new vehicle, pay down debts, or take a vacation.
When Is The Term Up On Reverse Mortgages?
There is no term limit on paying off the balance of the reverse mortgage as long as the borrowers are alive. Reverse mortgages are due if the following occurs:
- If the borrower or borrowers die, the estate need to repay the loan and keep the property (generally, with a HECM, the heirs may pay the lesser of the mortgage balance or 95% of the current appraised value of the home)
- If the borrowers decide to sell the property, they need to pay the reverse mortgage lender before they get any left over proceeds.
- The borrower decides to deed the property to the lender.
- In the event the borrowers abandon the property and let the mortgage lender foreclose.
What If Reverse Mortgage Borrower Wants To Sell Property?
A reverse mortgage loan borrower does not need permission to sell the property. If the homeowner decides to sell the property or if the property is transferred to someone else, the reverse mortgage is due and needs to be paid. In the event if the homeowner decides to sell the home, the title company will take the proceeds from the home buyer and pay off the lien on the reverse mortgage as well as other liens attached to the property and closing costs of the seller. The left over proceeds from the sale will go to the reverse mortgage borrower.
What Happens If The Borrower No Longer Lives In The Home?
In the event if the reverse mortgage loan borrower no longer occupies the residence, and moves out permanently such as a nursing home or a family member’s home because he or she can no longer take care of themselves for longer than 12 months and the move is permanent, the reverse mortgage is due and needs to be paid off.
What Happens If The Borrower Cannot Meet Terms Of The Reverse Mortgage?
A reverse mortgage loan borrower needs to meet the terms and conditions of the reverse mortgage loan. Some of the terms and conditions of the reverse mortgage will include being a owner occupant, have adequate homeowners insurance, and pay the property taxes as well as maintain the property in satisfactory condition. If the mortgage loan borrower does not meet the above conditions and the property is in disrepair, the reverse mortgage loan borrower is in default on the terms and conditions of the reverse mortgage loan and the reverse mortgage is due and needs to be paid off. The mortgage lender will work with the borrower in curing and getting the reverse mortgage back in compliance and give the borrower some time.
What Happens If Reverse Mortgage Is Due To Borrower Not Being In Compliance?
If the reverse mortgage loan borrower cannot come to compliance and still violates the terms and conditions of the reverse mortgage, the reverse mortgage will come due and needs to be paid off or the homeowner will face foreclosure or can deed the property to the reverse mortgage lender. When the mortgage lender forecloses on the home of the borrower, the mortgage balance of the reverse mortgage may exceed the value of the property. The negative balance is called a deficiency. With reverse mortgages, a deficiency judgment is not allowed so all the reverse mortgage borrower needs to do is sign off on the deed to the property to the reverse mortgage lender in the event they have no equity and not be liable.