A reverse mortgage is a special type of home loan that lets a homeowner convert the equity in his/her home to cash. The lender loans money to the borrower age 62 or older using the borrower’s home as security. The loans may be dispersed in a lump sum, monthly payments, or through a line of credit. Unlike traditional mortgages, reverse mortgages are repaid upon death, or when the owner can no longer live in the home. Then the lender can foreclose on the home due to an move to a nursing home and there are serious implications as well if the value of the home has declined and the amount of the loan exceeds the fair market value of the home.
There are no monthly payments until one of these events happens. These mortgages are advertised as a good way to overcome the “house rich but cash poor” dilemma that confronts many elderly homeowners but each individual’s situation must be considered, especially that of seniors in an unstable real estate market.
There is a federal law that authorizes home equity conversion mortgages for seniors. The purpose of the law is to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing and subsistence needs at a time of reduced or fixed income, and to encourage lender participation. Your first step should be to consult with your attorney and have all pertinent documents reviewed prior to signing anything.
Basic Requirements
- Borrowers must be age 62 or older; there is no maximum age limit. If there is more than one borrower, they must both be 62 or older.
- The mortgaged property must be used as the principal residence of the borrower and can be one to four units.
- The property must be in good repair; proceeds from the reverse mortgage may be used to make needed repairs.
- The property to be mortgaged must be free and clear of a mortgage or almost mortgagefree. The borrower will be required to pay the balance of the existing mortgage from the proceeds of the reverse mortgage. Credit history is not a factor in either of these federal programs but may be in a purely private reverse mortgage loan. Liens against the property would be an issue and most likely would have to be paid off with the proceeds of the loan.
Types of Reverse Mortgages
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There are two basic types of reverse mortgages or home equity conversion mortgages:
For the federally-insured “Home Equity Conversion Mortgage” (HECM), your home must be a single-family property, a two-to-four unit building, or a federally-approved condominium or planned unit development (PUD). For Fannie Mae’s “HomeKeeper” mortgage, it must be a single-family home, PUD or condominium.
Reverse mortgage programs generally do not lend on cooperative apartments or mobile homes, although some “manufactured” homes may qualify if they are built on a permanent foundation, classed and taxed as real estate and meet other requirements.
The amount of cash you can get from your home depends on which program you select and within each program-on your age, home and interest rates. For all but the most expensive homes, the federally-insured HECM program generally provides the most cash. Those funds may be distributed as a lump sum, as a line of credit or in a monthly amount. For the monthly option, it may be for a specific number of years, or as long as you live in your home. All of the reverse mortgages have costs and almost all of them can be put into the borrowed amount so that the only up-front cost to the senior is the appraisal.
Both of these Federal programs require that the homeowner(s) undergo counseling with a HUD approved non-profit organization before they can obtain a reverse mortgage.
Impact of Reverse Mortgages
A reverse mortgage has no impact on an individual’s receipt of Social Security or Medicare benefits, but it may have an impact on an individual’s ability to receive Supplemental Security Income (SSI) and Medicaid benefits. Reverse mortgage payments to an individual are not income since they are loans. But if an individual receives reverse mortgage proceeds and holds them beyond the month they are received, they are considered “liquid assets” and may adversely affect eligibility for SSI and Medicaid benefits.
Another important feature of these loans is that you can never owe more than the value of the home. In banking terminology they are known as “non-recourse” loans. You may find more information on reverse mortgages from the American Association of Retired Persons Home Equity Information Center, 601 E Street, NW, Washington, D.C. 20049; telephone: 1-888-687-2277 or www.aarp.org. Another excellent source of information is the National Center for Home Equity Conversion. This organization is a purely private, noncommercial wealth of information on this topic.
Occasionally, you may find a private lender, such as a bank that offers reverse mortgages and may have more flexibility in setting maximum loan amounts or placing higher age limits on borrowers, etc. However, the overall cost and interest rates may be higher and all the ramifications must be considered.