Secure your financial future with a Reverse Mortgage today!
Reverse Mortgages are not created equal. For your protection
Farris Mortgage only offers FHA-Insured Reverse Mortgages!
What is a reverse mortgage
Congress created the FHA Home Equity Conversion Mortgage program, (HECM) commonly known as a reverse mortgage in 1987 at the request of senior advocacy organizations that were worried about the growing number of seniors who were house rich but cash poor. To help seniors that were in financial distress with medicines, groceries, or even their existing mortgage payments. Your current mortgage, if any, must be paid off before obtaining any funds from a reverse mortgage. You can use proceeds from the reverse mortgage for this purpose.
A reverse mortgage is a loan for homeowners 62 years or older that uses a portion of the home’s equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage due to the non-recourse feature of the loan.
Eligibility for a reverse mortgage (HECM)
To be eligible for a reverse mortgage, (HECM) the Federal Housing Administration (FHA) requires that all borrowers be at least age 62. The home must be owned free and clear or any existing liens must be able to be satisfied with proceeds from the reverse mortgage at closing.
Eligible home types
Almost all home types are eligible. Mobile homes must have been built in the last 30 years, the land must be owned, it must be on a permanent foundation, and it must meet an FHA inspection. Some condos and townhomes may be eligible as well. All eligible property types must meet all FHA property standards and flood requirements.
Difference between a reverse mortgage and a home equity loan
Generally a home equity loan, a second mortgage, or a home equity line of credit (HELOC) has strict requirements for income and creditworthiness. Also, with other traditional loans, the homeowner must still make monthly mortgage payments to repay the loans. A reverse mortgage has less stringent income and credit requirements and the homeowner is not required to make monthly mortgage payments to the lender.
With a reverse mortgage, the amount that can be borrowed is determined by an FHA formula that considers the age of the youngest borrower or eligible non-borrowing spouse, the current interest rate, and the appraised value of the home. Generally, the more valuable the home (up to a certain point), the higher the loan amount will be, depending on lending limits.
As stated previously, with traditional loans, the homeowner is still required to make monthly mortgage payments. With a reverse mortgage, the loan is typically not called due and payable as long as the homeowner lives in the home as their primary residence, pays their taxes and insurance and keeps the home maintained. With a reverse mortgage no monthly mortgage payments are required, however the homeowner is still responsible for real estate taxes, insurance and maintenance. This is because you do not give up ownership of your home.
Outliving the reverse mortgage
A reverse mortgage cannot be outlived. As long as at least one homeowner lives in the home as their primary residence, pays their property taxes and homeowner’s insurance, and maintains the home in accordance with FHA requirements, the reverse mortgage will not become due.
In the event of death or in the event that the home ceases to be the primary residence for more than 12 months, the homeowner’s estate can choose to either repay the reverse mortgage or sell the home to satisfy the loan. A reverse mortgage may also become due and payable in the event the borrower fails to comply with the loan terms, such as paying property taxes and homeowner’s insurance.
If the equity in the home is higher than the balance of the loan, the remaining equity belongs to their estate.
If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA. No other assets of their estate can be affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from the estate by the lender if the value of the home is lesser than the loan balance.
The amount that is available generally depends on four factors: age (older is better), current interest rate, appraised value of the home and government imposed lending limits. Use the calculator to estimate how much could be drawn.
Distribution of money from a reverse mortgage
There are several ways to receive the proceeds from a reverse mortgage.
• Lump sum – a lump sum of cash at closing.
• Tenure – equal monthly payments as long as the homeowner lives in the home.
• Term – equal monthly payments for a fixed number of years.
• Line of Credit – draw any amount at any time until the line of credit is exhausted.
• Any combination of those listed above.
To be eligible for a reverse mortgage, the youngest homeowner must be 62 years old or older and have sufficient home equity.
Determining whether or not there is sufficient equity in the home is an FHA calculation that takes into account
• Current interest rate
• Whether the rate will be variable or fixed
• Age of the youngest borrower or eligible non-borrowing spouse
• FHA lending limits
• Appraised value of the home
You can use the online reverse mortgage calculator to find out if you have sufficient equity and what the loan principal limit would be.
Things that generally do not affect eligibility for a reverse mortgage:
• Discharged bankruptcy
• Health of the homeowners
Frequently asked questions:
• If a homeowner is not 62 but they are permanently disabled, can they qualify?
o No. The FHA uses age as criteria to determine reverse mortgage eligibility and makes no exceptions for disability or Social Security status.
• Can someone qualify if they have a mortgage?
o Yes. The majority of people who take out a reverse mortgage use it to pay off their existing mortgage so they can eliminate making monthly mortgage payments. Any existing mortgages must be able to be satisfied with proceeds from the reverse mortgage loan at closing.
• Do all 62-year olds who own their home qualify?
o No. Some homeowners who want a reverse mortgage are not eligible because they don’t have enough equity built up in their home.
The younger the homeowner is, the more equity they need to qualify. Also, some types of homes are not eligible.
• What happens if there isn’t enough home equity to qualify?
o This is called a “shortfall.” This means that the reverse mortgage would not provide enough money to pay off the existing mortgage on the home — it is coming up “short.” In this situation, some homeowners may choose to make up the difference by paying down the balance on their mortgage by the amount of the shortfall so that they can qualify for the reverse mortgage. However, most people who want a reverse mortgage and have a shortfall don’t have enough money to do this.
e-mail Brad Farris