How Does a Reverse Mortgage Work?
There are many factors to consider before deciding whether a reverse mortgage loan is right for you. The information below will assist you with the question of, “How does a reverse mortgage work” as well as outline the steps needed to access your home’s equity.
An important step required in the process of determining your eligibility and whether a reverse mortgage loan is the right choice you must meet with a HECM counselor so you can discuss program eligibility requirements, financial implications, alternatives to obtaining a reverse mortgage loan and repaying the loan.
Counselors will also discuss provisions for the mortgage becoming due and payable. Upon the completion of reverse mortgage counseling, you should be able to make an independent, informed decision of whether this product will meet your specific needs. You can search online for a HUD approved reverse mortgage counselor or call 800 569.4287 toll-free.
There are borrower and property eligibility requirements that must be met to qualify for a reverse mortgage loan. You can refer to the list below or simply use our reverse mortgage calculator to help you determine if you may be eligible to qualify.
If you meet the eligibility criteria, you can complete a reverse mortgage application by contacting an FHA-approved lender. You can search online for a FHA-approved lender or you can ask the HECM counselor to provide you with a listing. The lender will discuss the HECM program requirements, the loan approval process, and repayment terms.
Below are the basic eligibility requirements:
- The youngest borrower on title must be 62 years of age or older
- Own the property outright or have considerable equity in the home
- Occupy the property as your principal residence
- Receive HECM counseling from a HUD- approved reverse mortgage counselor
- Meet financial eligibility criteria as established by HUD.
The following eligible property types must also meet all FHA property standards and flood requirements:
- Single family home or 2-4 unit home with one unit occupied by the borrower
- HUD-approved condominium project
- Manufactured home that meets FHA requirements
HECM Features and Benefits
The amount of money you can receive is based on the age of the youngest borrower, prevailing interest rates and the lesser of the appraised value of the home, sale price or maximum lending limit. You may need to set aside additional funds from loan proceeds to pay for taxes and insurance.
No monthly mortgage payments are required. However, the borrower must continue to occupy the home their primary residence, pay property taxes and insurance, and maintain the home according to FHA guidelines. Failure to meet these requirements can trigger a loan default that may result in foreclosure. Interest and fees are added to the principal balance each month, resulting in a rising loan balance over time.
Borrowers may remain in the home indefinitely, even if the loan balance becomes greater than the value of the home – so long as the borrower meets the loan obligations.
Because HECM’s are non-recourse loans, you or your heirs will never owe more than the lesser of the value of the home or the loan balance, so long as the home is sold to repay the loan.
Mortgage Insurance Premium Safeguard
Borrowers pay an initial mortgage insurance premium (MIP) at closing which is 2% of the home value not to exceed $13,583, as well as an annual premium of .5% of the outstanding mortgage balance.
The mortgage insurance premium protects the borrower by ensuring they continue to receive their loan proceeds, even in the event that the lender becomes insolvent.