Understanding Reverse Mortgages:

Simply stated a Reverse Mortgage is a program that allows homeowners 62 years of age and older to use the equity in their house as cash without having to make monthly payments as long as they are living in the home. 

Many people think Reverse Mortgage is the loan where the bank takes your home, is this true?
No, this is probably the biggest misconception about Reverse Mortgages. When you take a Reverse Mortgage your name remains on title.  Banks are not in the real estate business, they are in the business of lending money.  The Reverse Mortgage like any other mortgage simply must be paid off when the borrower no long occupies the property.  If they sell or if the die and the heirs sell the property they simply use the proceeds of the sale to pay back the loan balance.  If the borrower dies and the heirs wish the keep the property they simply refinance to payoff the balance on the Reverse Mortgage. This is a non-recourse loan so if the loan balance exceeds the property value, they only pay back up to what the appraised value at the time of the sale.

What are the closing costs associated with Reverse Mortgages?
Closing costs on a Reverse Mortgage are pretty much the same as any other mortgage. The FHA Home Equity Conversion Mortgages or HECMs carry Mortgage Insurance Premium in addition to other traditional costs such as Title Work, Appraisal fee, recoding fees, etc.

What is the interest rate on a Reverse Mortgage?
The interest rates on the Home Equity Conversion Mortgage programs are set by the FHA and are based on the 1 year Treasury Bill.  The Fannie Mae Product called a  Home Keeper is based on the 1 Month CD and rates on the privately funded products available are determined by the Lender.

How much will a borrower qualify for if they choose a Reverse Mortgage?
The amount of money a borrower has available is determined by their age, the value of their home, FHA lending limits and the current "expected" interest rate. 

What if a borrower's house is worth much more than the FHA lending limit?
There are jumbo products available for higher value homes. 

How can a borrower take the funds from their Reverse Mortgage?
Reverse Mortgage applicants really have unlimited choices in how they take their proceeds:
1. Line of Credit: Money is left in an account until a need arises.  This money will grow resulting in access to more funds in the future. 
2. Lump Sum:  Client takes all monies available in one lump sum payment.
3. Tenure Payment:  Client receives a set amount monthly for life via check or direct deposit.
4. Term Payment:  Client receives a set amount monthly for a set period of time via check or direct deposit.
5. Any combination of the above is allowed and can be changed by the borrower as often as they like after the loan funds.

I understand there is a free, mandatory housing counseling session Reverse Mortgage applicants have to attend?
Yes, the Federal Government requires that all Reverse Mortgage applicants attend a free housing counseling session with a HUD approved counselor who has been trained by AARP and has no financial gain from the transaction.  FHA put this safeguard into place to protect our senior clients.
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What if a borrower's home is in disrepair?
If repairs are needed, they can be performed after the loan closes.  The money for the repairs is escrowed at 1.5% times the estimate provided by a licensed contractor.  The repairs, however, cannot exceed 15% of the value of the home.

What are the differences between a Reverse Mortgage and a Home Equity Loan?
There are two distinct differences between a home equity loan and a Reverse Mortgage.  First, home equity loans are based on income and credit scores.  Reverse Mortgages do not take income or credit into consideration when qualifying a borrower for this loan.  Second, home equity loans require monthly payments back to the bank, whereas a Reverse Mortgage does not place a monthly obligation on the borrower.    

What if borrower is currently in a Reverse Mortgage, but they need more cash?
Just like any mortgage a Reverse Mortgage can be refinanced if it makes sense for the borrower.  Since more equity is available as borrowers age or house values appreciate it is always a possibility more money would be available.

What if a borrower's spouse is under 62 years of age?
Since the requirement of a Reverse Mortgage states borrowers must be 62 years of age or older, anyone on title, including spouses, under the age of 62 must be removed from Title prior to the completion of a Reverse Mortgage.  While this can be done, I usually only recommend it in hardship cases, but sometimes there are other circumstances where a spouse is willing to remove themselves for other reasons.

What if there is a second mortgage on the property?
Any liens on the property must be paid from the proceeds of the Reverse Mortgage, including second mortgages, home equity loans and any IRS liens, or judgments attached to the property.

What are the tax implications of a Reverse Mortgage?
The Reverse Mortgage proceeds are considered a loan, and therefore, are tax-free. 

What are the borrower's responsibilities?
Your borrowers must live in the home as their primary residence, keep up the property and pay their property taxes homeowner's insurance.

What if a potential Reverse Mortgage borrower is in foreclosure or bankruptcy?
The Reverse Mortgage can be a great way to resolve these issues since there are no
income or credit requirements.   

Is it a requirement to pay off credit cards and other unsecured debt?
No, the borrower is only required to pay off any existing liens on the property.  

What happens when borrower dies?
When all borrowers have died, the loan becomes due and payable.  Their estate has the opportunity to sell the property or refinance with traditional financing in order to repay the loan balance.

What if Reverse Mortgage is for a husband and wife and one of them dies?
As long as one borrower is still living in the home, the loan remains in place.  The loan only becomes due when all borrowers have left the property.

Does a Reverse Mortgage affect Social Security or Medicare?
No, the Reverse Mortgage does not affect Social Security or Medicare.  

What if the borrower wants to sell their home in later years?
The borrower retains all rights to the property since their name remains on the title.  If they decide to sell the property, they simply must use the proceeds of the sale to pay off the loan balance and the leftover equity is theirs.

Is there a pre-pay penalty?
No, there is no pre-pay penalty on a Reverse Mortgage.

Can the borrower add a person to title or change the names on title after closing the Reverse Mortgage?
Any changes to the title of the property will make the loan due and payable.

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