How Does a Reverse Mortgage Work
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration (FHA) insured loan1. A reverse mortgage enables seniors to access a portion of their home’s equity without having to make monthly mortgage payments.2
The loan generally does not become due until the last surviving borrower permanently moves out of the property or passes away. At that time, the borrower or their heirs can choose to repay the reverse mortgage loan and keep the home, or sell the home to repay the loan. Any remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage. The loan may also be due if the borrower(s) no longer meet the loan obligations.2
There are several reverse mortgage safeguards in place to protect borrowers. Some of the key protections are listed below:
- The HECM is a “non-recourse” loan. If you sell the home to repay the loan, you or your heirs will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.
- Completing the mandatory counseling session with an FHA-approved counselor before an application can be processed helps to ensure borrowers have all the information they need.
- Lenders are required to complete a financial assessment of borrowers to evaluate their ability to pay taxes and insurance. If the analysis shows that borrowers may have difficulty keeping up with their financial obligations, they may be required to set aside proceeds from the loan to cover these costs. The purpose of this regulation is to ensure borrowers have the ability to fulfill their obligations for a reverse mortgage loan.
Benefits of a Reverse Mortgage Loan
A reverse mortgage loan may help you enjoy financial security and peace of mind, and allow you to remain in your home during your retirement years.
You have the freedom to use the net proceeds however you deem necessary. For example, you can use your proceeds to:
- Supplement your retirement income
- Consolidate debt
- Pay for medical care, prescription drugs and in-home care
- Cover large or unexpected expenses
- Make home improvements
- Live a more comfortable lifestyle
Some of the key eligibility requirements for a reverse mortgage loan are:
- The youngest borrower on title must be age 62 or older
- The home must be your principal residence
- You must have sufficient equity in your home
- You must meet financial eligibility criteria as established by HUD
- You must complete a HUD-approved counseling session
- Your home must be a single-family residence, a 2-4 unit owner-occupied home, or a FHA approved condominium or manufactured home that meets FHA requirements.
1 Federal Housing Administration (FHA) mortgage insurance premiums (MIP) will accrue on your loan balance. You will be charged an initial MIP at closing. The initial MIP will be 2% of the home value but not to exceed $12,723. Over the life of the loan, you will be charged an annual MIP that equals .5% of the outstanding mortgage balance.
2 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.