Reverse Mortgage 1.01
What is a reverse mortgage?
The loan most of us commonly call a reverse mortgage is almost always a particular type of loan called a Home Equity Conversion Mortgage (“HECM”). An HECM is a specific type of reverse mortgage that is insured by HUD and the FHA. An HECM is subject to certain limits in property value, but this type of reverse mortgage generally gives the highest loan to value and the best interest rates. For those reasons, HECMs tend to be more popular than other types of reverse mortgages, and, consequently, the vast majority of reverse mortgages are HECMs. For purposes of this article, I will use the general term “reverse mortgage” to encompass both HECMs and non-HECM loans.
A reverse mortgage is a low-interest loan that uses a home’s equity as collateral. The amount of the reverse mortgage is a percentage of the value of the home, and it can be paid to the homeowner in a lump sum, in periodic payments, or through draws, as with a regular home equity line of credit. A reverse mortgage does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away.
What happens when I pass away?
Upon the death of the homeowner, the estate has a period of time within which it must pay the balance of the reverse mortgage, and it may sell the property in order to do so. This makes sense if the balance of the reverse mortgage is less than the value of the property at the time of the homeowner’s death. If, on the other hand, the home is worth less than the amount of the reverse mortgage, the estate is not liable to pay the balance of the mortgage. The reverse mortgage lender must take the loss and submit a claim to FHA (assuming the reverse mortgage is an HECM).
Will I ever have to repay a reverse mortgage?
As long as at least one homeowner is alive and still using the property as a primary residence, the reverse mortgage need never be paid back. A reverse mortgage lender can never call the loan or foreclose simply because the homeowner has not repaid it. However, the homeowner is still responsible for paying all expenses associated with the property, including property taxes and homeowners’ insurance premiums.
Who qualifies for a reverse mortgage?
A reverse mortgage, unlike other types of home equity loans, has no credit or income requirements. That is because the homeowner is never expected to repay a reverse mortgage. That’s not to say there are no eligibility requirements for a reverse mortgage. The most important requirement is that all of the homeowners must be at least 62 years old. In addition, the homeowners must either own the property outright or have paid off approximately half of the mortgage. The property must also pass an FHA inspection and, if it is a mobile home, it must be fewer than 30 years old.
