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Reverse Mortgage: What Are the Requirements?
A reverse mortgage allows homeowners 62 years and older to tap the equity they have built up in their homes over the years. Reverse mortgage requirements are very different from the rules that cover traditional mortgages, and it’s essential to understand them before deciding to take out such a loan.
Getting a reverse mortgage can help some seniors who need cash to pay for home repairs, health costs or living expenses. But such a loan can limit what you do with your property and where you live. It can also affect what you leave your heirs.
What is a reverse mortgage?
A reverse mortgage is a home-backed loan in which the lender takes the equity in your home and gives you access to some or all of it. The amount of money you’ll have access to depends on:
- How old you and any co-borrowers are. How old do you have to be to get a reverse mortgage? At least 62 years old. If more than one borrower’s name is on the loan, all must be at least 62.
- How much the home is worth, based on an appraisal.
- The type of reverse mortgage you choose
- Prevailing interest rates.
You also may be able to choose whether you receive the reverse mortgage funds as monthly payments, a line of credit or a lump sum.
You’re not required to pay back the money from a reverse mortgage as long as you live in the leveraged home. However, when you pass away, sell the home or move somewhere else, you have to repay the loan, including interest, which accumulates every month.
If the loan balance grows to more than your home is worth when you sell it — based on an appraisal of the fair market value, the mortgage insurance you buy with a reverse mortgage will pay back the difference to the lender.
There are three kinds of reverse mortgages:
- A home equity conversion loan (HECM) is a federally insured loan that allows you to use the money for any purpose you choose. These are the most common kind of reverse mortgages.
- A single-purpose reverse mortgage may be available from some state or local governments or non-profits. As the name suggests, you can only use the money for one purpose, which the lender will specify. These are for low- and moderate-income homeowners who need to pay taxes or make home repairs.
- A proprietary reverse mortgage is a private loan.
How much is a reverse mortgage?
A reverse mortgage comes with many expenses, including some that you find with a regular mortgage loan. The Consumer Financial Protection Bureau (CFPB) states that reverse mortgages cost more than other kinds of home loans. And unlike other mortgages, the amount you owe on a reverse mortgage gets bigger the longer you have the loan.
Before you take out an HECM loan, you must meet with a reverse mortgage counselor, who must have Department of Housing and Urban Development approval.
The counselor will make sure you understand how much the loan costs, explain different types of reverse mortgages and take you through various payment options. The counselor can charge you “a reasonable fee,” but you can’t be charged if you can’t afford it, CFPB advises.
A reverse mortgage requires a variety of charges that are due at closing. Those include:
- Origination fees. These are paid to the lender and cannot be more than $6,000.
- Closing costs, which are similar to those in any real estate transaction. You’ll likely pay for an appraisal, title search, inspections, property survey, credit checks, recording fees and other charges, which can add up.
- Mortgage insurance. If you’re getting a government-backed loan, you’re required to have mortgage insurance. The initial premium is due at closing, and you’ll pay an annual fee after that. The annual premium is 0.5% of the mortgage balance.
After closing, charges are added to your loan each month. If you have an HECM, these fees could include:
- Interest charges.
- Service fees the lender charges. These fees cover administrative costs, such as sending account statements. The fee is capped at $30 a month if it’s a fixed-rate loan and $35 if the interest adjusts.
- Annual mortgage insurance premium.
- Property taxes and homeowner’s insurance, if the lender pays those costs for you.
Requirements for a reverse mortgage
Reverse mortgage requirements cover borrowers and their financial situation.
Reverse mortgage qualifications require that the buyer:
- Be 62 years or older.
- Have equity in your home — whether you own it outright or have considerably paid down the mortgage.
- Use the property as your principal home, occupying it for most of the year.
- Have no federal debt delinquencies, such as owing back taxes.
- Have enough resources to pay property taxes, property insurance and homeowner association fees.
- Receive counseling from a HUD-approved reverse mortgage counselor.
You also must meet financial requirements. While HECM loans have no specific income requirements, the reverse mortgage lender will check your income, assets and credit history. Reverse mortgage eligibility requires that you pay your real estate taxes, homeowners insurance and flood insurance, if required, on time.
You also must be able to afford continued maintenance and upkeep on the house. The lender wants to be sure the home maintains its value.
Reverse mortgage repayment process
In most instances, a reverse mortgage allows you to live in the home until you pass away or you move somewhere else, like an assisted living facility. At that point, all the money you borrowed, plus fees and interest, must be paid back to the lender.
If you or your heirs sell the house to raise the money to repay the loan, you may keep the difference if the home sells for more than you owe on the reverse mortgage.
If the sale of the home is less than the loan balance and sold at the appraised fair market value, your mortgage insurance will cover the difference between what you raised and the amount you owe.
If your reverse mortgage goes into default, you’ll get a notice that the loan is due and you must pay it. In that case, you can sell the home for 95% of the appraised value and apply the money to the unpaid balance. Mortgage insurance will pay for the rest of the loan.
If co-borrowers take out the loan, and one of them dies, the other can continue to live in the home and receive loan payments. The surviving borrower must continue to meet the obligations set out in the reverse mortgage.