Reverse Mortgage Basics
Reverse Mortgage Basics By Gustan Cho
A reverse mortgage is a mortgage loan that is geared for homeowners who are 62 years old and older who have equity in their homes. The reverse mortgage lender will advance you funds based on the equity you have on your home. Once you close on your reverse mortgage, you do not have to ever make a mortgage payment until you either sell your home or pass away. You are responsible to pay for your property taxes and insurance as long as you own your home. Homeowners who are 62 years old or older who do not have sufficient equity in their homes or who still have underwater mortgages due to the real estate collapse will not qualify for a reverse mortgage.
How Do Reverse Mortgage Works: Reverse Mortgage Basics
The best way to explain how reverse mortgages work is via a case scenario. Lets take an example where Borrower X is 72 years old and owns a home in Tampa, Florida that is valued at $100,000 and a mortgage loan balance of $20,000. Borrower X currently has a mortgage payment of $800.00 per month and his property taxes are $100 per month ( $1,200 per year ) and his homeowners insurance is $100 per month ( $1,200 ) per year. Borrower X has only social security income of $1,500 per month and after paying his mortgage, property taxes, homeowners insurance, utitlities, and living expenses, he barely has enough to survive on and cannot even afford to take a vacation or save for a rainy day.
Equity Is Required For Reverse Mortgages: Reverse Mortgage Basics
With the above case scenario with Borrower X, a reverse mortgage would be ideal for him. Since he only has a first mortgage loan balance of $20,000 on a home that is worth $100,000, Borrower X has sufficient equity in his home and he would be a perfect reverse mortgage loan candidate. Reverse mortgage lenders will normally lend between 40% to 70% loan to value. The older the reverse mortgage borrower is, the higher the loan to value. For math reasons, lets just assume that at the 72 year old age bracket, Borrower X is eligible to borrow up to 60% loan to value which on this case scenario is $60,000 ( 60% of $100,000 home value ). The $60,000 loan will be funded after the reverse mortgage lender pays off all liens on his property which is $20,000. The balance, $40,000, will go to the reverse mortgage borrower and the borrower can do whatever he pleases with the proceeds and not have to worry about making a single mortgage payment for the rest of his life or until he decides to sell his home. The mortgage lender will add the principal and interest of the $60,000 mortgage loan every month to the balance of the mortgage loan so every month, the balance of his mortgage loan will keep on increasing until the reverse mortgage is paid off.
When Does A Reverse Mortgage Needs To Be Paid Off? Reverse Mortgage Basics
A reverse mortgage does not have to be paid off. Reverse mortgages do not have a balloon payment due nor does it have an expiration period. The reverse mortgage loan borrower does not have to make a mortgage loan payment for the rest of his life. There may be cases where a reverse mortgage loan borrower may live over 30 years after he or she gets a reverse mortgage and the mortgage lender may have a mortgage loan balance that is way higher than the value of the mortgage loan. The mortgage lender is protected because FHA insures the mortgage lender in the event this case scenario happens.
Reverse Mortgage Basics: Reverse Mortgage Eligibility Requirements
Since reverse mortgages are based on equity of the home the reverse mortgage loan borrowers has, there is no income nor credit requirements. As long as the reverse mortgage loan borrower has equity in their home and as long as the borrower is 62 years old or older, the borrower will qualify for a reverse mortgage.
The borrower only can be on the title on a reverse mortgage. If the reverse mortgage loan borrower has a non-borrowing spouse who is under the age of 62 years old, they cannot be on the title of the home.
To qualify for a reverse mortgage, the reverse mortgage loan borrower needs to be an owner occupant and the home needs to be the primary residence of the borrower. A principal owner occupant residence is defined as when the homeowner lives on the subject property for at least 6 months and 1 day out of each calendar year. Proof of residency can be provided by providing tax returns, drivers license, and utility bills.
All liens of the property needs to be paid off with the funds of the reverse mortgage and the reverse mortgage lender needs to be in first position. This includes old mechanics liens.
If the reverse mortgage loan borrower works out of their home, no more than 25% of the square footage can be allocated towards business and/or commercial use.
Reverse Mortgage Basics: Eligible Properties For Reverse Mortgages
Single family homes, FHA approved condominiums, manufactured homes, and multi-unit properties up to 4 residential units all qualify for a reverse mortgage loan. With multi-unit properties, the reverse mortgage loan borrower needs to occupy one of the units as their primary residence. All properties are subject to appraisal and appraisal reviews and there must be comparables. Unique properties with no comparables and co-ops are not eligible for reverse mortgages.