The process of getting a reverse mortgage can be very confusing. That's why Jon Karuschkat in Arkansas, works hard to make sure all of his clients understand every aspect of the loan and how it works for them.
Keep in mind before reading the following FAQs, they are not from HUD or FHA and have not been approved by HUD, FHA or any federal government.
Yes. Most reverse mortgage loans are Home Equity Conversion Mortgages or HECMs. This is a reverse mortgage insured by the U.S. federal government, only available through an FHA-approved lender. In addition to HECM loans, some lenders may offer proprietary reverse mortgage loans, which are not insured by the federal government and are typically designed for borrowers with higher home values.
Some state and local governments and non-profit organizations also offer single-purpose reverse mortgage loans. These reverse mortgage loans may be used only for the purpose specified by the lender (for example, home repairs or property taxes). They may only be available in some areas and only for homeowners with low-to-moderate income. These non-HECM reverse mortgage loans are not federally insured.
Yes. One of the hallmark advantages of a HECM reverse mortgage loan is you do not have to repay it until you sell your home, permanently move out of it, pass away, or do not comply with your loan terms. If your heirs are left to settle your estate, and there is an outstanding loan balance after they sell the home, they are not responsible for making up the difference. FHA insurance steps in and makes up the deficit.
No. Unlike most traditional mortgages, you don’t have to boast a certain credit score or have a job to obtain a reverse mortgage loan. What you do need, however, is the ability to show you can comfortably meet the terms of your loan, which include maintaining your home and paying your property taxes and homeowners insurance.
To determine whether you can meet that standard, your lender will review your income, cash flow, credit history, and other financial factors as part of a financial assessment. Even if the financial assessment shows that meeting the loan’s monthly obligations would be a financial strain, you may still be loan-eligible with the implementation of a Life Expectancy Set-Aside or LESA. This is a reserve account set up specifically to pay your property taxes and homeowners insurance over the expected life of your loan. This money (considered a “mandatory obligation”) is subtracted from your principal limit. As long as there is money in the LESA, your property taxes and homeowners insurance are automatically paid, which could lighten your financial burden in retirement.
Unlike a home equity line of credit (HELOC), if you select a reverse mortgage line of credit, the line generally cannot be frozen, reduced, or canceled as long as you continue to honor your loan terms. Also, unlike a home equity line of credit (HELOC), which typically requires interest payments soon after your loan closes, a reverse mortgage line of credit requires no ongoing repayment of interest or principal unless you permanently leave your home or fail to comply with your loan terms.
Many borrowers use their reverse mortgage line of credit as an expanding financial safety net. There is no charge to keep the line open and whatever portion of the line remains untouched continues to grow at the same rate as the interest accrued on the loan, plus the 0.5% annual mortgage insurance premium. So, if the interest rate on your reverse mortgage is 3.5%, then your available line of credit will grow at 4% (3.5% 0.5%). Altogether, these features can provide great peace of mind.
There’s no one-size-fits-all answer to this question because every borrower is different. That said, there are five key factors that will largely determine your reverse mortgage loan payout. These factors are your age, your home’s value (minus liens against it), current interest rates, your financial obligations, and the payout plan you choose.
¹Although your home’s value is a major factor in determining payout, there are limits on the maximum value that a lender can consider. For the government-insured Home Equity Conversion Mortgage (HECM), the maximum reverse mortgage limit you can borrow against is $970,800 in 2022, even if your home appraises higher.
For proprietary reverse mortgages, home value limits may differ according to the lender. For example, the maximum reverse mortgage claim limit for AAG’s Advantage Jumbo Reverse Mortgage Loan is $10 million.
To get a better idea of what kind of payout you could expect from a reverse mortgage, speak with a reverse mortgage professional. This professional will educate you on the reverse mortgage process, focus in on your specific situation, and help calculate your expected reverse mortgage payout by considering all of the factors above.
The fees and cost of a reverse mortgage loan are based on a number of items. For example, an origination fee is paid to the broker/lender and a mortgage insurance premium (MIP) is paid to FHA on the Home Equity Conversion Mortgage (HECM). There are also appraisal, flood certification, document preparation, title, settlement, and escrow fees. All costs are clearly shown on the Good Faith Estimate (GFE).
The FHA requires a one-time Mortgage Insurance Premium (MIP) and the payment of an annual MIP. The upfront Mortgage Insurance Premium (MIP) of 2% is calculated using your home's appraised value or a maximum of $970,800 (the 2022 national lending limit cap) and is charged at closing. The annual FHA insurance premiums of 0.5% are calculated using each month's outstanding loan balance.
Yes. Counseling is required with an independent third-party, HUD-approved counselor to ensure prospective borrowers understand what a reverse mortgage loan is, how it works, what their obligations would be under the loan, and whether it or another home equity solution is the best financial solution for their needs and goals. The lender must be in receipt of the counseling certificate before it can submit the applicant’s loan application for approval. To locate a reverse mortgage counselor near you, contact your mortgage loan originator or your local HUD office.
The proceeds you receive from a reverse mortgage are a loan, not income. Therefore, the proceeds should not be taxable. But as with all tax questions, first consult your accountant or tax advisor.
For your down payment, you could use the proceeds from the sale of your previous home or tap savings or other assets. Your HECM reverse mortgage loan would provide the additional funds to satisfy the purchase price. Not only will your initial cash outlay be less than it would be for an all-cash home purchase, but your monthly cash flow is likely to increase as a HECM for Purchase requires no monthly mortgage payments. You are still responsible, however, for maintaining your home and paying your property taxes and homeowners insurance. Your loan repayment only comes due when you leave the home or if you fail to comply with loan terms.
Is a reverse mortgage loan a backdoor way for your lender to own your home?
No. A reverse mortgage loan is simply a loan and financial tool designed to help you retire better. When taking out a reverse mortgage loan, you, not the lender, retain title to the home. Even if you were to exhaust all your loan proceeds, you cannot lose your home as long as you comply with your loan terms, such as maintaining your home and paying your property taxes and homeowners insurance. The lender puts a lien onto the title to ensure repayment of the loan. These same requirements apply to a traditional mortgage.
Reverse mortgage loans are designed to serve older Americans. Hence, you must be 62 or older to be eligible. Your spouse could be younger. Here are some other requirements for taking out a reverse mortgage:
A big attraction of a reverse mortgage loan is that, as long as you stay current on the loan requirements, you don’t have to pay off the loan until you leave the home. You can also choose to make payments anytime to lower the outstanding balance of your reverse mortgage. You can also pay off the loan anytime without penalty.
But typically, reverse mortgages are paid off following one of the following events:
If selling the home is the option selected with a standard HECM loan, heirs generally have six months to complete the sale. If the home has not sold in that period, they can request from the servicer a 90-day extension, subject to approval by HUD. One additional 90-day extension can be requested, again with HUD’s approval. Any remaining equity in the home after the sale and loan is paid to the owner or heirs.
If the loan balance is larger than the home’s sale price, HECM borrowers or their heirs are only responsible for the amount their home sells for, even if the loan balance exceeds this amount. FHA insurance, which the borrower has been paying since the loan’s inception, covers the remaining loan balance.
In instances when heirs prefer to keep the home instead of selling it (perhaps the home has fallen in value and is now a relative bargain), they can do so at 95% of the home’s valuation. They can use personal savings or funds to pay off the loan or pursue a variety of financing options, including financing the reverse mortgage loan into a traditional mortgage or refinancing the home into another reverse mortgage, if they meet the eligibility criteria.
²It is possible to live in multiple homes in a year. However, you have to occupy one as your principal residence, on which you have your reverse mortgage, for the majority of the year.