Applying for and taking out a reverse mortgage loan is an important decision for senior homeowners, and it’s one that deserves time and research.

Reverse mortgages enable homeowners 62 years or older to supplement their retirement income by converting a portion of their home’s equity into accessible cash flow.  Reverse mortgages are powerful financial tools, but they are not one-size-fits-all.

To fully understand the ins and outs of this product, homeowners should remember and be aware of the following rules:

1. There’s a Lending Limit for HECM Loans

As great as it would be to borrow an unlimited sum of money, the reality is, homeowners can only borrow according to Department of Housing and Urban Development rules.

As determined by the Federal Housing Administration, the Home Equity Conversion Mortgage reverse mortgage limit is currently $1,089,300. But not everyone will be able to receive the maximum amount.

Factors that determine how much money someone can borrow through a HECM reverse mortgage include:

  • Age of the youngest borrower (or eligible non-borrowing spouse)
  • Appraised value of the home (up to $1,089,300)
  • Current interest rates

2. Reverse Mortgage Counseling is a Must

Reverse mortgage proceeds can help immensely with retirement planning, but borrowers need to first go through the counseling process.

During these sessions, homeowners will meet with an unbiased reverse mortgage counselor, and they’ll be able to ask questions about the HECM loan terms, rules, process and more.

During the required counseling, homeowners will learn that taking out a HECM loan doesn’t exclude them from the following applicable homeowner obligations for the life of the loan, depending on the property type:

  • Property taxes
  • Homeowners Association Fees
  • Homeowner’s insurance

Additionally, borrowers will also find out to borrow a HECM loan, they can’t be delinquent on any federal debt.

Examples of federal debt are:

  • Student loans
  • Direct loans
  • HUD-insured loans
  • Small Business Administration loans

Once the counseling mandate is completed, homeowners will receive a certificate that is part of the loan application.

3. Only Certain Property Types Qualify

For for homeowners to take out a reverse mortgage, they must meet a handful of requirements pertaining to the home.

Homeowners need to own their home outright or have a low enough mortgage balance that it can be paid off with the reverse mortgage. A borrower must maintain the home as his/her primary residence.

Switching gears to home qualifications, the following rules are in place regarding homes and how they’re built:

  • A home must be classified as single family (if property is multi-family, one unit must be occupied by the senior homeowner)
  • Vacation homes and secondary homes don’t qualify for reverse mortgages
  • Manufactured homes and condominiums may qualify for a reverse mortgage

Understanding the above property rules helps senior homeowners better position themselves to successfully apply for a reverse mortgage.

4. Non-Borrowing Spouse Protections May Apply

non-borrowing spouse (NBS) is not named on the home title a spouse and he or she can be any age, thus he or she doesn’t qualify to be a full borrower on a HECM reverse mortgage. But in 2014, HUD introduced new rules to better protect non-borrowing spouses.

A surviving non-borrowing spouse can remain in the home after the borrower has passed away if the non-borrowing spouse meets certain requirements. It’s important to talk with your lender and reverse mortgage counselor if you plan to take a reverse mortgage and your spouse is not on the home title.

Senior homeowners who are taking out a reverse mortgage loan will want to ensure their spouse is included in the transaction and is party to the reverse mortgage contract. This will help keep a spouse protected in the event the fully qualifying spouse passes away.

5. Homeowners Can Choose Among Several Payment Options

When taking out an adjustable interest rate reverse mortgage, homeowners will need to choose from five payment options:

  • Line of credit (installments or unscheduled payments delivered at homeowner’s choosing)
  • Modified tenure (combination of line of credit and scheduled monthly payments)
  • Modified Term (combination of line of credit and scheduled monthly payments for fixed number of months)
  • Tenure (monthly payments delivered if one borrower maintains residence in primary property)
  • Term (monthly payments for a set number of months)

When taking out a fixed interest rate loan, homeowners will receive payouts in one lump sum. Line of credit and tenure are popular options among homeowners, but the payment option is ultimately up to each individual homeowner.

Senior homeowners looking to supplement retirement spending should strongly consider applying for a reverse mortgage.

Before and during the application process, however, homeowners should review important rules to fully understand the ins and outs of a reverse mortgage to make the most of the loan.

Breaking these 3 Rules Have Consequences 

There are a few specifications the borrower must maintain on an ongoing basis to keep the reverse mortgage loan in good standing.

They are very simple but are essential.

2. Occupancy

The borrower must occupy the home as his or her primary residence. Once the borrower moves or leaves the home “permanently” or for more than one year, the loan becomes due and payable. If the borrower moves to an assisted living facility or nursing home, at that point the loan will have to be repaid.

2. Tax and insurance

Under the terms of the reverse mortgage, the borrower must pay annual property tax as well as maintain a homeowner’s insurance policy. These requirements come along with almost all home loans, so anyone who has held a forward mortgage will be accustomed to these ongoing property charges. Failure to pay either property tax or maintain homeowner’s insurance will result in the loan becoming due and payable.

3. Maintaining the home

The final requirement of an FHA-insured reverse mortgage is maintaining the home’s condition. The home must remain in good repair throughout the course of the loan, as determined by the loan servicer. Upkeep of the home along with paying property tax and insurance and remaining in the home will ensure the borrower is in good standing on the reverse mortgage and can age in place if he or she chooses.

Top FAQs

Q.

What are the basic rules of a reverse mortgage?

The borrower must be 62 or over and the home must meet HUD eligibility requirements. HUD has financial assessment guidelines that all borrowers must meet that include both income and credit qualification standards. The income is not overly difficult to meet, and the credit requirements do not use credit scores. The Credit requirements do depend a lot of borrower’s payment of debts in the past 24 months with scrutiny on the payment of property related payments (mortgages, rents, taxes, insurance, HOA dues, etc.).
Q.

What are the rules when someone dies with a reverse mortgage?

When the last original borrower or eligible non-borrowing spouse permanently leaves the home due to incapacity or death (or any other reason), the loan becomes due and payable. Borrowers or their heirs then have the right to repay the loan with funds available to them or by refinancing the loan, they can sell the property and repay the loan with the sale proceeds, or they can walk away and owe nothing. If the borrower(s) die and heirs wish to keep the home, but the mortgage balance is greater than the value of the home, the heirs can repay the loan in full for an amount equal to the amount owed or 95% of the current value of the home, whichever is less.
Q.

What are some specific rules for reverse mortgages in California?

California is one of the few states that imposes an additional time on the front end that is like the right of rescission that borrowers have on the back meant to give borrowers a “cooling off” period after counseling. Lenders cannot begin processing a loan for a borrower for at least 7 days after borrowers have completed their counseling. Regardless of whether HUD will allow a returning borrower to waive counseling or not within a 5-year period, the state of California will not, and all borrowers must attend counseling for each new loan. Spouses and non-borrowing spouses must attend counseling. In the state of California, it is mandatory that the hot water heater be double strapped.
Q.

What are some specific rules for reverse mortgages in Texas?

In the State of Texas, you cannot do a loan for a non-borrowing spouse, whether eligible or non-eligible. The reverse mortgage loan must close within 180 days of counseling, or the borrower(s) must be re-counseled. The Preliminary Title Report is valid for 90 days per Texas state law. If the loan does not close within that period, the lender must order a new, updated report. Texas loans cannot close with a Life Estate interest in the property. The loans in Texas also cannot close in the name of a trust. Transactions must use an attorney to review title and closing package who is in the state of Texas.
Q.

What are some specific rules for reverse mortgages in Florida?

The state of Florida requires that each loan gets a copy of the survey or a signed survey affidavit. Florida requires the charges of transactions that can add considerably to the loan costs in that state. Florida charges additional taxes such as Intangible Taxes and Documentary Stamp Taxes. Although these are not lender fees, they are costs of moving and of getting new loans in Florida and must be considered.

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