You may have heard about reverse mortgages on television or from a friend and are not quite sure what they are, or you may already know what a reverse mortgage is and are not sure if it is right for you. You may be interested in a reverse mortgage but have fears about what will happen to your house. Maybe you are wondering if a reverse mortgage would work for your parents.
Whether or not to get a reverse mortgage is a serious decision. It may or may not be the best option for you, depending on your situation. Knowing more about reverse mortgages and how they work can help you to make an informed decision.
Chapter 1: The Basics
What is a reverse mortgage?
Many seniors find themselves with a limited income, but a significant amount of equity in their homes. A reverse mortgage is a tool that allows you to take the equity out of your house without having to sell it or make payments. Like the name implies, a reverse mortgage is the reverse of a traditional mortgage. The value of your house is divided into equity (the amount of the house that you own) and debt (the amount of the house that the lender owns through a mortgage loan provided to you). With a traditional mortgage you make payments on your loan to the lender each month, increasing your equity and decreasing your debt. Eventually, if you stay in the home, you will own it free and clear. With a reverse mortgage the lender gives you money instead. Essentially, you are getting back the equity in your house through a loan. Thus, a reverse mortgage reduces your equity and increases your debt. (Eventually you could have no equity in your house.) While you are in the home you do not need to make any payments to the lender, and you get to keep the title to your house. The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). (Because the HECM is the most common reverse mortgage program, and its rules and features are set, while other programs can have varying features, it is what is primarily discussed here. Unless otherwise noted, the term reverse mortgage refers to a HECM. Other options are discussed in Chapter 4.) While you get a HECM directly from a private lender, it is insured by the federal government through the Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD).
Most people get a reverse mortgage on a home they already own and live
in. However, you can also get a reverse mortgage to purchase a new home,
assuming you will make the home your primary residence. If you sell your
old home and have the cash to purchase a new home, why would you want to
get a reverse mortgage? Many people don't want to tie up all of their
money in a house in case they have unexpected expenses, like medical
bills, but also don't want (or can't afford) to make a smaller down
payment and get a traditional mortgage. Of course, you could always
purchase the home with cash and get a reverse mortgage later, but it can
be convenient to do both at the same time.
Who can get a reverse mortgage?
There are several qualifications that you need to meet in order to be able to get a HECM.
All individuals on the title of the home must be at least 62 years old.
The home must be your primary residence.
You must own your home free and clear or have a significant amount of equity in your house. Reverse mortgage lenders require that their mortgage is the first mortgage on the home (meaning that they are the first ones that get paid if your house is foreclosed on). If you have a traditional mortgage on your house you need to get enough from the reverse mortgage to pay it off.
Your house must be a single family residence, two to four unit home with at least one unit occupied by you, condominium, or townhouse. You usually cannot get a reverse mortgage on a mobile home or a cooperative.
The home must be completely constructed and have a certificate of occupancy.
Your home’s condition cannot be below HUD’s minimum property standards.
You must complete counseling with a HUD-approved counseling agency.
Unlike with a traditional mortgage, your credit score and income have no effect on whether or not you are able to get a reverse mortgage, since you are not making monthly payments.