Top 10 Steps to a Reverse Mortgage

reverse-mortgage-loans-150x150By retirement age, most people will have gone through the mortgage process at one point or another. The mortgage obtained would have been either to obtain a new home, lower a current mortgage rate, take out cash as a result of home equity, or to reduce the term of an old mortgage. At retirement age, a person is finally eligible for a reverse mortgage. Read on to discover the advantages of a reverse mortgage and how to get one.

Advantages of a Reverse Mortgage

  • Tax free cash. A reverse mortgage is not a lump sum or additional income. A reverse mortgage borrower therefore enjoys tax-free cash.
  • No default risk. Unlike other mortgage loans where you risk losing your home and other assets by virtue of default, you could only lose your home if you default on the home equity loan. The lender has no right whatsoever over your assets.
  • Federal insurance cover. The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM). It is federally insured; you still continue to receive your cash payments even if your lender defaults.
  • Home ownership is retained. Unlike other mortgages where the lender maintains the ownership title, you retain the ownership title yourself. You can therefore live there all the time, make changes to the home’s appearance and structures or even sublet some rooms depending on the terms of the lender.
  • Flexible payment options. Depending on your cash needs and financial circumstances, you get to choose how you would like to receive cash payments. You can receive the cash as a lump sum, as a credit line, as an annuity or a combination of the last two methods.

The Steps to a Reverse Mortgage

Basically, the major step towards a reverse mortgage is deciding whether you need one or not. If the advantages it offers are attractive to you, then don’t procrastinate further. These are the steps to a reverse mortgage:

  1. Conduct detailed research on reverse mortgages. Obtain thorough information related to reverse mortgages on the web. If you receive unsolicited invitations, then don’t respond to them because they could be scams. Look to your friends, family members and acquaintances for tips who may have taken reverse mortgages before.
  2. Compare quotes. There are several lenders who will definitely make attractive offers. Compare all of the quotes from these lenders. With the help of a mortgage calculator, find out how much you need to repay monthly without straining your income sources. Pick the lenders with the most competitive rates.
  3. Consult potential lenders. Once you’ve narrowed down the list of potential lenders further, consult necessary resources so that you are sure about the most appropriate lender. For instance, you could find out whether they are registered by the National Reverse Mortgage Lender Association (NRMLA) or the Better Business Bureau (BBB) and whether they are approved by the FHA. Don’t forget to check the testimonials from previous borrowers.
  4. Inquire about all terms and conditions. If you want a HECM reverse mortgage then you should opt for the best terms and conditions because these vary from lender to lender. These include interest rates, credit score qualifications and closing costs, among others. Narrow down to a single lender with the most suitable terms and conditions.
  5. Apply for reverse mortgage. Furnish the lender with your application done in person. The documents which may be required include proof of age (ID card or Driver’s License), proof of your Social Security Number and a copy of your homeowners’ insurance cover. Where applicable, you may also be asked for a complete copy of the family trust, a copy of the power of attorney, an original death certificate and a statement of any mortgages on property. Review your application forms carefully before submitting them.
  6. Get counseled. One of the requirements of HUD is that any reverse mortgage applicant be counseled by a HUD-approved third party. You can choose to attend the counseling session via phone or in person. Loan processing will not commence until you’ve obtained a signed certificate from the counselor. You may attend the training session in advance even before applying for the loan.
  7. Inspect and obtain an appraisal report of the home. With your application forms and counseling certificate, you can now have an appraisal done on your home. The lender will refer you to an FHA-approved appraiser to furnish you with a detailed appraisal report. It is advisable that you are available during the appraisal process so that you make any inquiries and answer any questions from the certified appraiser.
  8. Loan underwriting. Your loan must be underwritten by an underwriter who is approved by FHA. The lender will refer you to an underwriter.
  9. Close the deal. Once underwriting is done, you will arrange a meeting with the lender to finalize the deal. It is important at this stage to review all your application forms once again in order to confirm that all the information you submitted is correct. Confirm all the terms and conditions once again just to be sure of what you are committing to. You can then sign the papers and close the deal. You have three business days after signing the deal to change your mind if you think otherwise—referred to as the rescission period.
  10. Obtain the funds. Once the deal is sealed you will receive the funds. You can choose to receive the funds as a lump sum, a monthly fixed payment, a line of credit or a combination of the last two methods as you deem fit. You can use the cash to pay off your mortgage and any other existing loans as it suits you.

The maximum lending period for a reverse mortgage is 15 years. Re-evaluation of your property will also be taken once every 5 years of the term of the loan. Compared to other loans, this is one you should almost certainly take advantage of!

Top 10 Things to Know if You’re Interested in a Reverse Mortgage

reverse-mortgage-150x150A reverse mortgage enables you to borrow money against the value of your home. The mortgagor (lender) does not expect any principal and interest repayments until you either sell the home or die—whichever comes first. Lenders always require that you don’t have any other loans before they can grant you a reverse mortgage. A prime requirement is that if there is any lien on your home, then it must be repaid off with the proceeds from the reverse mortgage. The number of people opting to take reverse mortgages is on the rise because of the extra cash that one retains at the end of the deal. Could this be an option for you?

Benefits Of A Reverse Mortgage

  • There are no monthly repayments. Payments are made only when you refinance, sell your home or die—whichever comes first. This enables you to enjoy doing other things instead of committing to monthly repayments.
  • There are no prepayment penalties. HECM, FHA-insured secured mortgages can be fully or partially paid any time at no additional fees or costs.
  • Tax benefits. The income obtained from a reverse mortgage deal is tax free. The homeowner can therefore use the money obtained to fulfill other financial obligations.
  • Simple qualification requirements. Unlike other types of mortgages which require the borrower’s employment details and credit rating, only the borrower’s age, value of the home and the current interest rates are required.
  • Asset protection guarantee. The amount payable at the end of the period of the term for the reverse mortgage is the sum of accrued interest plus the actual fees received. The amount repaid will therefore never exceed the value of the home; so long as you sell the property to repay this reverse mortgage.

Important Things To Know About A Reverse Mortgage

  1. Qualifications. For you to qualify for the FHA HECM reverse mortgage, you must be a homeowner aged 62 years or more. You must rightfully own your current home or have a very low mortgage balance that can be cleared by proceeds arising from the reverse mortgage. You must legally reside in that home. FHA requires that you subscribe to a HECM counselor to receive relevant consumer information at a very low cost or free of charge just before obtaining the loan.
  2. The title to the home. Unlike other types of mortgages where the title is retained by the lender until full payment is made, the owner retains the title. However, payment for the home must be made at the end of the mortgage term.
  3. Property taxes and insurance. The borrower continues to pay homeowner’s insurance and property taxes. As a homeowner, you are expected to reside in that home as their primary residence and maintain it in good condition—which allows the homeowner to keep the loan according to their wishes.
  4. It is non-recourse. Neither the homeowner nor their heirs will be responsible for a part or any part of the loan which can’t be repaid from equity resulting from the home. The liability of the reverse mortgage borrower is therefore limited to the value of the home.
  5. Modes of receiving payments. There are five modes of payment that you can select as a homeowner:
    • Line of Credit- unscheduled installments without a regular pattern which you select as you wish.
    • Term- equal monthly payments that last for a fixed period of months agreed upon.
    • Modified Term- combination of both the term and the line of credit according to the homeowner’s wishes until exhaustion of the whole amount.
    • Tenure- equal monthly payments proceeding to the borrower as long as they retain the house as their primary residence.
    • Modified Tenure- this is a combination of both the term and the line of credit as long as the homeowner still resides in the home.
  6. Inheritance of the estate. In case the home is resold or not used as the borrower’s primary residence, any interest, cash or other charges arising from the HECM must be repaid in good time. If there are any proceeds beyond these amounts they revert to your spouse, or estate; the remaining equity is transferable to your heirs.
  7. Eligible types of homes. FHA requires that your home must be either a single family house or a 2-4 unit house with one of them being occupied by the owner in person. Other HUD approved manufactured homes and condominiums which meet the stipulated FHA requirements are also eligible for a reverse mortgage.
  8. Comparison with a home equity loan. A home equity loan or second mortgage requires that applicants have adequate income not only to qualify for the loan, but also to demonstrate capacity to make monthly payments on the interest and the principal amount. On the other hand, a reverse mortgage is different because it pays you rather than having you pay. However, you need to pay utilities, insurance premiums against floods and other hazards as well as real estate taxes.
  9. Right of rescission. What if you change your mind after taking a reverse mortgage? Well, the HECM allow you to cancel your loan after three days if you decide otherwise. This is referred to as the three-day right of rescission. Inquire from the mortgagor about their requirements because different lenders have varying rules on the same.
  10. The amount you can receive from a reverse mortgage- the amount entitled to a homeowner from a reverse mortgage transaction depends on the age of the borrower, the prevailing interest rate, the initial mortgage insurance premium (HECM SAVER or HECM Standard) and the lesser of the appraised value of the home, the sales price or FHA limit (currently $625,000). You receive a higher amount if you are older and the interest rate is lower.

A reverse mortgage enables the homeowner to create more money for alternative uses, especially at the age of 62 when productive capacity is very low. However, you should conduct thorough research on the overall loan costs before making a decision.

Reverse Mortgage Interest Rates – What You Need to Know

A-seniors-guide-to-reverse-mortgage-loansAvailable only to home owners or buyers over 62 years of age, reverse mortgage loan that gives you the possibility of converting a part of the equity in your home into cash. In a regular mortgage, the loan has to be paid back monthly, but in a reverse mortgage the loan is paid when the borrower dies. The heirs have the option of refinancing and paying back the loan, give the home to the lender, or selling the home and cashing out the remaining home equity. When applying for a reverse mortgage loan, there are no credit score requirements because there are no payments made on the mortgage.

Types of Reverse Mortgages

The three basic types of reverse mortgages are:

  • The single-purpose reverse mortgage. This is a type of reverse mortgage that is offered by government agencies and non-profit organizations, and it’s geared towards seniors with low to medium income. The single-purpose reverse mortgage can only be used towards the purpose defined by the organization that gives the loan, like paying for home repairs or property taxes.
  • The federally-insured reverse mortgage. Also known as Home Equity Conversion Mortgages (HECM) and backed by the government through the U. S. Department of Housing and Urban Development (HUD), the federally-insured reverse mortgage is more expensive, but can be used for any purpose and has no income requirement.
  • The proprietary reverse mortgage. A type of reverse mortgage that is offered by a private company, based on the borrower’s age, income and property value.

Loan Size and Cost

The maximum amount that you can borrow through a reverse mortgage loan is $625,500. Loans that exceed this amount are called jumbo reverse mortgages and, besides having higher fees, are not insured by the Federal Housing Administration (FHA). The factors that determine the amount that you can borrow are the property value, interest rate and age of the borrower.

Reverse mortgage loans are not taxed and won’t interfere with your Social Security or Medicare benefits. You will have to pay an origination fee, a mortgage insurance premium(MIP) for HECMs, a title insurance, and different other closing costs.

Interest Rates

Interest-RatesAdjustable interest rates were offered through all reverse mortgage programs before 2007. Several reverse mortgage organizations offer fixed interest rates now, but with the condition that the borrower takes out the whole amount offered after closing. On the other hand, when taking out a loan with an adjustable interest rate, the funds can be provided as a monthly payment or a line of credit.

Interest rates are usually lower for a reverse mortgage loan than they are for a regular home equity loan, but they are not deductible on income tax returns until the loan is paid off in part or in full.

One disadvantage to reverse mortgages is the raised upfront cost, but the high upfront cost is later mitigated by the lower interest rates. Seniors must be fully documented before taking this step, as it’s a fairly confusing process that can become very costly for them or their heirs.

Reverse Mortgage – How Does a Reverse Mortgage Work?

While the most recent economic downturn has most homeowners wondering where the market will decide to turn regarding their overall sense of financial security, the previous four decades have nonetheless shown a strong and stable rise in the value of the country’s housing portfolio. In broad terms, a significant portion of the population have resided in their current homes for quite a while, and have subsequently reaped a good amount of equity build-up as a result. As the overall age of this demographic sector advances, specifically those who are in or approaching retirement age, many find themselves with not as much savings to fall back on as once hoped. Combine this with having access to only moderate means or sources of available income, this equity represents a large share of their accumulated net worth.

Reverse MortgageMany consumers are exploring the numerous options in the lending market to access this yet untapped asset. The more conventional methods are home equity lines or refinancing their existing mortgages, to name a few. However, should monthly payment obligations or low income resources be a factor, these options could be difficult for an older borrower to qualify for. For those in the population pool that are moving toward the golden years of life, and would like to seek out another very popular concept making its way into the realm of financial possibilities, the answer might be a reverse mortgage.

What is a Reverse Mortgage?

In this broad summary, the loan option referred to as a reverse mortgage takes it’s definition and characteristics from its very name – in simple terms, it is the exact reverse process of a standard mortgage loan. It is a lending mechanism that permits a homeowner from the age of 62 years or older to tap into the equity of their home. It becomes the means to provide the homeowner with access to either a large ‘lump sum’ source of cash, or, a way to create a comfortable source of tax-free monthly income.

With a standard type of mortgage program, the typical borrower is obligated to maintain a monthly repayment schedule back to their lending source in order to repay the funds that were originally provided by the lender to either buy or refinance the home. Naturally, these repayment amounts include the interest applied to the loan in the approval and closing process. The loan procedure making up the reverse mortgage process is just the reverse. In this case, the lender provides the monthly payments to the homeowner. In addition, the home is used as security or collateral for the loan amount by the lender in a reversed mortgage, just as it would be in a standard type of mortgage.

Reverse Mortgage Funding Options

Getting FundedThere are certainly some key aspects in the reverse mortgage program that determine exactly what amount and what type of funding is available from a loan of this kind. Primary factors such as the value of the existing home are most important. The higher the market value, the higher the loan amount. Another factor is the borrower’s current age, along with a co-borrower’s age if applicable, and generally, the older a borrower is, the more funds will be available. The mortgage interest rates will be a factor as well, and will play the usual role in the funding decision as they do in a standard mortgage – the lower the rates, the more loan a borrower has access to. Geographical area also plays a role in the lending equation, and state and federal guidelines will determine if there are specific lending limits required.

There are three types of reverse mortgage funding guidelines a homeowner can decide upon based on their specific income needs. As mentioned, the first is the lump sum arrangement to allow the most access to the most cash all at once. The next option is the setting up of a monthly payment income stream. This option has two variables. One is to schedule the payments for a fixed time period, called a term type, or, until such time that the borrower (or borrowers) no longer resides in the home, called a tenure type. The third option is when borrowers can choose to set up a line of credit to draw from, accessing the funds as they need them. Almost two thirds of the borrowers who utilize the reverse mortgage concept choose the most popular line of credit option.

The Fine Print on a Reverse Mortgage

Based on the loan proceeds, there are indeed interest charges that will be accumulating on the funds that are withdrawn. However, there will be no monthly payments to be made on the loan. Also, the balance on the loan must be paid off at such times as the borrower either moves or sells the residence, or passes away, or if the ownership of the residence transfers to another individual. In addition, should the sale price of the home exceed the mortgage balance, the difference stays in the hands of the owner or is transferred to the heirs of the estate.

An additional stipulation is that at such time as the present mortgage is completely paid, this being a mandatory requirement, the funding issued with the reverse mortgage can be utilized for any purpose the borrow may need, whether for home improvements, medical expenses, or other debt consolidation. Reverse mortgages are an option for generally all types of property, though there are state-sanctioned guidelines with respect to co-ops. These reverse mortgage programs are federally insured private loans, and are provided through the U.S. Department of Housing and Urban Development (HUD), and handled through the auspices of the Federal Housing Agency (FHA).

The guidelines require that every potential borrower must receive assistance or counseling from a HUD approved agency before proceeding with the loan application. The counseling is necessary to ensure the terms and risk factors of the program are completely clear. Counselors are mandated to review all of the implications of the reverse mortgage program and each of its potential options. For every home-owning member of the senior demographic considering the advantages of living the stress-free retirement way of life, then the reverse mortgage can be a very rewarding and financially sound means to achieving that goal.