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All Your Reverse Mortgage Questions Answered
Before you apply for a reverse mortgage and trade some of your home equity for cash, make sure you understand the ins and outs of these creative loans, including requirements to qualify. This frequently asked questions (FAQ) should provide most of the information you need to make a decision.
How do reverse mortgages work?
While this type of loan might seem like a traditional mortgage on the surface, the reverse mortgage loan actually works in the opposite way of any other loan. Why? Instead of the homeowner making mortgage payments, the lender pays the homeowner via monthly payments or a lump sum.
Homeowners trade their equity in exchange for these payments, yet they aren’t required to move and they can continue living in their homes for as long as they can.
What are the most common reasons to get a reverse mortgage?
Senior citizens turn to reverse mortgage loans when they’re heavy on home equity and light on cash. These loans allow individuals to access the equity in their homes without having to take out a home equity loan or HELOC, and without having to sell their property and move.
Many people take out a reverse mortgage in order to access cash they can use to pay for living expenses or medical bills, although it’s not uncommon to use reverse mortgage funds to pay for travel and other experiences that help senior citizens enjoy their golden years.
Do you need good credit to qualify for a reverse mortgage?
Because you’re using your home as collateral for a reverse mortgage loan, you don’t need good credit to qualify. The Federal Housing Administration secures Home Equity Conversion Mortgages, or HECMs, so these loans often go to consumers who have imperfect credit that might prevent them from qualifying for other home equity products.
What are the main benefits of a reverse mortgage?
While reverse mortgage benefits can vary depending on the consumer, these loans provide access to a broad range of advantages for most of their customers. Common benefits include:
- Access monthly payments or a lump sum of money in exchange for your home equity
- You can stay in your home as long as you are able regardless of how much home equity you have
- You can qualify with imperfect credit
- Spend the funds however you want with no limits on where you can use the money
- No monthly mortgage payments required by the homeowner
- Homeowners can finance closing costs and other fees in their loan
- Loan proceeds are not considered taxable income
- Reverse mortgages are non-recourse loans, meaning you and your heirs are not liable for additional charges if your loan amount exceeds your home’s value
What are the requirements for a reverse mortgage?
Reverse mortgages are geared to senior citizens who have plenty of home equity they can access. For that reason, you need to be 62 or older to qualify for a reverse mortgage, and you should have considerable equity in the property you currently reside in. To qualify for a reverse mortgage, you must also meet the following requirements:
- You cannot be delinquent on any federal debt such as federal income taxes or student loans
- You must be able and willing to pay for proper maintenance on your home as well as property taxes and homeowners insurance
- Your home must be in acceptable shape per your lender’s requirements
- You also need to agree to attend a HUD-approved counseling session regarding your eligibility for a reverse mortgage and the loan process
What is the most popular type of reverse mortgage?
The most popular type of reverse mortgage is one backed by the federal government. This reverse mortgage, known as the Home Equity Conversion Mortgage (HECM), is the Federal Housing Administration’s version of the reverse mortgage loan, and the one most reverse mortgage customers actually use.
HECM loans come with the same eligibility requirements as any other reverse mortgage loan, and you can use them for your principal residence provided you live in a single family home, a home with 1 to 4 units, a HUD-approved condominium, or a manufactured home.
What kind of fees should you watch out for with a reverse mortgage?
When you apply for a reverse mortgage, you’ll have to pay a fee to attend HUD-approved counseling for this type of loan. Other upfront fees you’ll have to pay include:
- Origination fees, which are capped at $6,000 and paid directly to your lender
- Real estate closing costs including an appraisal, title search, surveys, inspections, recording fees, mortgage taxes, credit checks and more
- An initial mortgage insurance premium
Ongoing fees for reverse mortgage loans include interest, any service fees charged by your lender, annual mortgage insurance premiums of .05% of your loan amount, and property charges for your home such as homeowners insurance, property taxes, and fees for maintenance and repairs.
Are there any limits on how you can use reverse mortgage funds you receive?
You can use the funds from your reverse mortgage however you want, whether that means splurging for a bucket list trip around the world or having some spending money to carry around. Many reverse mortgage customers also use their loan funds for groceries, prescription medicines, and other bills they might struggle to keep up with otherwise.
Whether you receive a lump sum of money or agree to monthly payments, reverse mortgage proceeds are yours to use however you want.
Can you still leave your home to your heirs?
If you take out a reverse mortgage, you may be wondering if you can still leave your home to your heirs. The answer to this question is a tricky one.
You can leave your home to your heirs, but they won’t receive title to the property free and clear while you have a reverse mortgage in place. Instead, they’ll have to pay back any amounts owed on the loan to keep your home.
Will a reverse mortgage affect my Social Security or Medicare benefits?
One big benefit of reverse mortgages is that, for the most part, these benefits aren’t affected by your loan proceeds. However, reverse mortgage funds could impact your ability to qualify for other need-based aid.
When does the reverse mortgage have to be paid back?
The reverse mortgage loan becomes due when the homeowner passes away or must permanently move out of the property for other reasons. However, heirs that might inherit your home do not have to repay your reverse mortgage loan to gain title to your property. They also have the option to sell your home and use part of the proceeds to repay your reverse mortgage. Your heirs can also choose to do nothing and let the reverse mortgage provider foreclose on the home.