A reverse mortgage is a loan that converts the borrower’s home equity into payments from a lender and, typically, does not require any mortgage repayments as long as the borrower continues to live in the home. HOWEVER, the borrower has to continuing paying insurance and taxes on the home. Industry reports indicate that almost all reverse mortgages are made under the Home Equity Conversion Mortgage (HECM) program, which is administered by the Department of Housing and Urban Development (HUD) through the Federal Housing Administration (FHA). While other types of Reverse Mortgages are available, such as Standard Reverse Mortgage that can have higher fees and costs associated with it than an HECM Savers. There is also a HECM for Purchase which allows you to borrower for the purpose of buying a new home.
Reverse mortgages typically are “rising debt, falling equity” loans, in which the loan balance increases and the home equity decreases over time. As the borrower receives payments from the lender, the lender adds the principal and interest to the loan balance, reducing the homeowner’s equity. The loan amount that a lender can advance to a borrower depends on three factors. First, the loan amount is based on the “maximum claim amount,” which is defined as the lesser of the appraised value of the house. Second, the age of the borrower affects the borrower’s loan amount—the older the borrower, the higher the loan amount. However, if there is more than one homeowner, the loan amount is based on the age of the youngest borrower. Third, the interest rate also affects the loan amount. Typically, the lower the interest rate, the higher the loan amount.
General eligibility restrictions and requirements:
Borrower must be at least 62;
Must speak to a HUD Approved Housing Counselor;
Home must be your primary residence; and
Borrower cannot have any delinquencies on any federal debt, suspensions, debarments, or excluded participation from FHA programs in order to qualify for HECM or HECM Saver.
You must have paid off most, or all of your traditional mortgage.
Benefits of a Reverse Mortgage:
Only pay taxes and insurance (no principal and interest mortgage payment) while you live in your home;
No income, medical, or credit requirements; and
As long as you live in the home you can choose several payout options that fit your financial need.
Line of Credit – you only pay interest on money you use. The amount of money available to you can grow over time.
Monthly Payout – the monthly amount may grow over time and can be a good choice if you need additional monthly income to cover day-to-day expenses.
Lump Sum – this is a bit more risky. If you borrower more than you need, you will be required to pay interest on all of it even if you don't use it all.
Costs Associated with HECM (for detailed explanation of costs and fees ask the lender you select and make sure to ask about the overall risks associated with this mortgage product):
Loan Origination Fee;
Third Party Fees (such as appraisal, inspection, title policy etc.);
FHA Mortgage Insurance Premiums;
Servicing Fees; and
Interest.
Don't sign any loan documents unless you understand how your reverse mortgage will work. You may also contact a HECM counselor from FHA's National HECM Counseling Network. These counselors provide both face-to-face and telephone counseling nationwide and you are required to speak to one before you make any decisions regarding a reverse mortgage.
HECM for Purchase program is available to allow seniors to purchase a new primary residence and obtain a reverse mortgage within a single transaction. The program is also designed to assist in relocation to other geographical areas, downsize, or to purchase a home that meet their physical needs, Eligibility is similar to that of a Reverse Mortgage/HECM but there are some variations, at least one of the borrowers be 62 or older, and intend to purchase a new primaryresidence using loan proceeds from a reverse mortgage.
Certain properties are ineligibe for the program, such as:
Cooperative units
Newly constructed residences where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority
Boarding houses
Bed and breakfast establishments
Existing manufactured homes built before June 15, 1976; and
Existing manufactured homes built after June 15, 1976 that fail to conform to the Manufactured Home Construction Safety Standards, as evidenced by affixed certification labels (e.g., data plate and HUD certification label) and/or lack a permanent foundation as required in HUD's Permanent Foundations for Manufactured Housing Guide or homes that are installed or were occupied previously at another site or location.
If you want further assistance LendingTree strongly encourages you to visit the FHA Resource Center.
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