Types of Reverse Mortgages
Do you want to get access to your home equity, but aren’t certain which option is right for your needs? We can help. When looking to tap into home equity, homeowners need to choose the product that will work best for their unique situation. The reverse mortgage option is a beneficial product for those who are eligible, but what is it? Is it the same as a Home Equity Conversion Mortgage (HECM)?
Simply put, all HECM’s are a type of Reverse Mortgage, but not all Reverse Mortgages are HECM’s. Let’s look at the differences between the different types of reverse mortgages to explain the available choices.
What is a Reverse Mortgage?
A reverse mortgage loan is similar to a traditional mortgage in that it allows the homeowner to borrow money using their home as collateral. Unlike a traditional mortgage, there is no required monthly principal and interest payment. The title to the home remains in the borrower’s name, and the loan is repaid when the borrower no longer lives in the home.
Most common reverse mortgage loans are Home Equity Conversion Mortgages (HECM) for active adults age 62+ which are insured by the Federal Housing Administration (FHA). There are also proprietary Jumbo Reverse mortgage loans for active adults 55+ depending on the state, which are not insured by FHA, however, offer loan amounts up to $4 million for higher home values and both products are reverse mortgages and share many characteristics.
How much can you borrow?
The amount of funds you can receive through a reverse loan depends on the age of the youngest borrower, the value of your home, and current interest rates. Generally, the older you are and the more equity in your home, the more funds you can access.
Repayment
There is no payment required while the borrower occupies the property. The loan becomes due when the borrower no longer occupies the home as a primary residence. Generally, the borrower remains in the home for the rest of their life and the estate will be tasked with settling the balance. This can be achieved by selling the home with any remaining funds going to the estate, signing a Deed in Lieu over to the lender, or simply purchasing the home and paying off the loan.
Since reverse mortgages are non-recourse, the estate can purchase the home for 95% of current market value even if the loan balance is higher. Keep in mind that you’re still responsible for taxes, insurance, and upkeep of the home.
Non-recourse loan
Reverse mortgage loans are non-recourse. This means that neither you nor your heirs can ever owe more than the home is worth. Even if the loan balance were to exceed the home value, the borrower will not be responsible.
Counseling requirement
Before obtaining a reverse loan, you must undergo counseling. The counselor will provide information about the loan, its implications, and other available options.
Homeownership & Obligations
A reverse mortgage allows homeowners to keep their property. They must still pay property taxes, insurance, association fees (If applicable), and maintain the home in good condition. They do not need to make monthly principal and interst mortgage payments as long as they live in the home as their primary residence.
Qualifications
Unlike a traditional mortgage which takes debt to income (DTI) ratio into concern and credit scores into consideration, a reverse mortgage considers the borrowers ability to sustain their lifestyle over the period of the loan. UW guidelines are different than traditional mortgage in that less income may be required to qualify given there is no mandatory monthly principal and interest mortgage payment.
How do you get the funds?
There are multiple options for you to access funds. You can do a single lump sum disbursement. You can take equal monthly payments for as long as you occupy the property as a primary residence, or equal monthly payments for a fixed period of months/years.
If you choose to keep the available funds as a Line of Credit which grows over time*, then you can access the funds any time and amount of your choosing. You can even do a combination of all options, meaning take a lump sum, schedule a monthly payment for a period of time and leave a portion in your line of credit to continue to grow for future use. . How you get the funds is really up to you! **
How is a HECM Different?
A HECM is unique in that it is insured by FHA***. The HECM program was born out of Congressional hearings in the 1980’s and specifically designed to allow homeowners 62 & older access to equity in their home.
Since that time, the product has developed significantly through legislation and partnership with the American Association of Retired Persons (AARP). Consistent counseling policies have been developed, the HECM for Purchase (H4P) was established, and most recently guidelines to protect the consumers through creation of financial assessment guidelines have been mandated. The HECM program today is an exclusive program offered as a benefit to homeowners with many strategic uses.
- Asset Strategy – empower your portfolio of investments to grow or to help your savings last longer
- Home Purchase – buy a new dream home or a second vacation home
- Line of Credit - maintain liquidity for future use
- Property Upgrades - fund home repairs, modifications or renovations
- Maximize Cash Flow - supplement monthly income or retirement benefits to live your best life
HECM Eligibility
You must be at least 62 years old, occupy the property as your primary residence, have sufficient equity in the property, not be delinquent on any federal debt, and have financial resources to pay ongoing property charges such as insurance, property tax, association fees, etc.
HECM Loan Limits
The HECM maximum claim amount is set by the Federal Housing Administration, and it changes each year the housing markets continues to grow. Information on the most current amounts can be found at FHA Mortgage Limits which currently exceed $1.2M.
Counseling
HECM mortgages require the borrower to use an independent HUD approved counselor to receive all the required education about the program to ensure you make an informed decision prior to applying for the loan .
How are Jumbo Reverse Mortgages Different?
Jumbo Reverse mortgages are not insured by HUD, but instead offered through private lenders and therefore don’t require FHA mortgage insurance. They allow for greater flexibility because they aren't restricted by the FHA loan limit or age restriction. Jumbo Reverse mortgages offer loan amounts up to $4 million for higher value properties, and allow borrowers as young as 55 years of age depending on the state.
The cash disbursement options also vary based on the reverse mortgage type selected. Jumbo Reverse mortgages also require counseling with an independent Reverse Mortgage counselor to ensure you have all the necessary details before you proceed with the loan application.
Which reverse mortgage option is right for me?
HECM loans account for the majority of the Reverse mortgage market, but a Jumbo Reverse Mortgage loan may be a better fit for a homeowner with a primary residence valued over FHA Lending Limits who wants to get the most funds possible. You should research your options available and speak to one of our Reverse Mortgage Specialist. We can develop a comprehensive proposal to lay out all your options and guide you to the best decision!
Contact our team to talk to a HECM pro today and get the process started. The access you need to your home equity is a lot closer than you think!
* If part of your loan is held in a line of credit upon which you may draw, then the unused portion of the line of credit will grow in size each month. The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on your loan.
** Borrowers who elect a fixed rate loan will receive a single disbursement lump sum payment. Other payment options are available only for adjustable-rate mortgages.
*** Rate is an FHA Approved Lending Institution.
Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees may be assessed and will be added to the loan balance. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan, refinance the loan with a new financing, or use other assets to repay the loan in order to retain the property. You should know that a reverse mortgage is a negative amortization loan which means that your mortgage balance will increase while your home equity decreases if you do not make principle and interest payments on your loan. However, you will never owe more than the home is worth when the loan is repaid.
This is not a commitment to lend. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, hazard insurance, HOA dues (as applicable) and maintaining the home in good condition. If the borrower does not meet these loan obligations, then the loan may become due and payable. Otherwise, the loan must be repaid when the last borrower passes away or sells the home. Prices, guidelines and minimum requirements are subject to change without notice. Some products may not be available in all states. Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision. This material has not been reviewed, approved or issued by HUD, FHA or any government agency. Rate is not affiliated with or acting on behalf of or at the direction of HUD, FHA or any other government agency. To find a Reverse Mortgage counselor near you, search the HECM Counselor Roster at https://entp.hud.gov/idapp/html/hecm_agency_look.cfm or call (800) 569-4287.