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 $970,800.
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 $970,800)
- 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 that in order 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
In order 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
A 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 as long as 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 the Rules Have Consequences
There are a few specifications the borrower must maintain on an ongoing basis in order to keep the reverse mortgage loan in good standing. They are very simple, but are essential.
-Remaining in the home
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.
-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.
-Maintaining the home
The final requirement of a 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 as long as he or she chooses.
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