Reverse Mortgage FAQ’s

 

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Is it expensive?

Not necessarily. The majority of closing costs and fees can be financed into the reverse mortgage loan. The only upfront costs typically required are for the Housing and Urban Development ( HUD) required independent counseling session. Compared to selling a home and moving, a reverse mortgage loan can provide relatively cost efficient access to your home equity.

When does it have to be paid back?

The loan becomes due when all of the homeowners have passed away or permanently move out of the home, provided that taxes and insurance are paid and the property is maintained according to Federal Housing Administration (FHA) standards.

Why are there no monthly payments?

A reverse mortgage loan allows you to convert a portion of the equity in your home into cash.  Instead of making monthly mortgage payments to the lender, the equity that you’ve built up over years of making mortgage payments can be paid to you.

Are there limits on how I can use the money?

No. The funds can be used without restriction.

Does a reverse mortgage sell the home to the bank?

Banks and other lenders seek to make loans and earn interest, not to own property; consequently, the bank or lender does not purchase the home. Instead, the bank or lender adds a lien in the form of a reverse mortgage loan onto the title so they can eventually collect the amount loaned plus interest.

Will the estate inherit the home?

The estate does inherit the home but there will be a lien on the title. If your heirs wish to retain the property, then the full amount of the loan must be paid regardless of property value. The amount due at loan maturity is the principal borrowed, accrued interest, and service fees.

For example, if someone with a $250,000 home passes away and leaves a reverse mortgage loan balance of $80,000, then the estate would sell the home for $250,000, repay $80,000 to the bank, and keep the $170,000 difference.

As a “non-recourse” loan, the only asset guaranteeing the reverse mortgage loan is the property and not the whole estate. If the home sells for less than the reverse mortgage loan balance, the assets of the estate are not responsible for making up the difference.

Can the homeowner get forced out of the home?

The FHA reverse mortgage loan exists to help the homeowner to stay in their home, and  no monthly mortgage payments are required.  However, the homeowner must reside in the home as their primary residence, pay their property and homeowners insurance and maintain the home. In the event the borrowers do not adhere to these responsibilities, HUD guidelines may require the servicer to initiate foreclosure proceedings.

Will Social Security or Medicare be affected?

Entitlement programs like Social Security and Medicare are not affected. However, need-based programs like Medicaid can be affected based on the specific program requirements. You should consult with a qualified financial advisor to learn how a reverse mortgage loan could impact eligibility of some government benefits.

Are taxes owed on a reverse mortgage?

Loan proceeds are not considered income and are not taxable; however, you must continue to pay property taxes. Consult a tax advisor for more information.

Is it similar to a home equity loan?

A home equity loan and a reverse mortgage loan both use the home’s equity as collateral.

My parents have passed away and they have a reverse mortgage. What are the next steps?

The heirs should first contact the loan servicer to notify them that the borrower(s) have passed away. This information can be found on the monthly statement. The loan servicer will then be able to guide the heirs on the next steps.