If you’ve been around for a while, chances are you might have heard of a thing called a reverse mortgage. While you may have heard of it, many people do not know exactly what it is. Either way, this article is going to explain exactly what a reverse mortgage is and what it does.
A reverse mortgage is a loan given to home-owning elders that makes use of a portion of the equity of the home as collateral. In most cases, the loan does not have to be paid back until the final surviving homeowner moves out permanently or passes away. When that happens, the estate has exactly 6 months to pay off what’s left of the balance of the reverse mortgage, or they have the option to sell the home in order to pay off the balance.
Any and all equity that remains is then inherited by the estate, and the estate is not personally responsible if the home sells for less than the balance of the reverse mortgage.
In order to be eligible to receive a reverse mortgage, the Federal Housing Administration (or FHA) mandates that all homeowners be at least 62 or above. If the resident does not own the home free and clear, any existing mortgages must be paid off using proceeds from the reverse mortgage loan at closing. Also, a person must meet financial eligibility requirements as established by the HUD.
A reverse mortgage generally doesn’t become due as long as you meet the loan obligations. Such obligations include: living in the home as your primary residence, continuing to pay required property taxes, homeowners insurance and maintain the home according to requirements made by the Federal Housing Administration.
If you die or the home ceases to be your primary residence for more than a year, the estate of the homeowner can choose to either pay the reverse mortgage or put the home up for sale. If the equity in the home is more than the balance of the loan, the remaining equity then belongs to the estate. However, if the sale of the home is not enough to pay off the reverse mortgage, then the lender must take a loss and request to be reimbursed by the FHA. However, no other assets are affected by a reverse mortgage (i.e. investments, second homes, cars, and other valuable possessions cannot be used to pay off the reverse mortgage).
The amount of the loan mostly depends on a few factors, namely: age, current interest rate, appraised home value and government-imposed lending limits. You can use a calculator to get an idea of how much you might be able to receive, but you also might need to put aside additional funds from loan proceeds in order to pay for taxes and insurance.
While there is a lot more to reverse mortgages, the purpose of this article was just to give you a bit more knowledge as to what such a mortgage is, and some of the requirements and things that you or a loved one can expect if applying for a reverse mortgage is being considered.