What is a Reverse Mortgage Loan?
It is a loan for homeowners 62 years or older who wish to convert a part of their home equity into readily usable cash.
Unlike conventional loans where a borrower pays a lender for the loan principal and interest monthly, it is the lender that pays the borrower. Thus, it is called a reverse mortgage.
When does the borrower pay for the loan?
Borrower’s payment begins in the event that the borrower decides to sell or move out of the home, or when the borrower dies.
Is there an existing government-insured reverse mortgage?
Yes. The only Federal Government-insured reverse mortgage is the Home Equity Conversion Mortgage (HECM). This is offered by FHA-approved lenders.
What are the qualifications of an FHA-approved reverse mortgage?
- The homeowner shall be 62 years old or older at the time the loan is closed.
- The home must be the primary residence of the borrower. A secondary or investment home is not qualified in this case.
- The home must be owned outright or has been paid down considerably.
- The home should be a single-family or has 2-4 units with one occupied by the borrower.
- The borrower needs to undergo an approved counseling course at the beginning of the loan process.
- Last March of 2015, a financial assessment was added as part of the new guidelines for reverse mortgage. This will determine if you have the financial capacity to pay for property taxes and insurance over the life of the loan.
Is there anything that the borrower needs to pay to keep the loan current?
The only responsibility a borrower has is keeping him/herself current on property/real estate taxes, homeowner insurance, utilities and other hazard and flood insurance. It’s also essential that the homeowner maintains the home in a reasonable state.
Why is there a need for a Reverse Mortgage Counseling Course?
The FHA requires prospective borrowers to undergo a counseling course from an approved counselor. This way, the borrower can discuss with an approved professional concerning the pros and cons of a reverse mortgage loan, how things work in a reverse mortgage loan, its cost and tax implications among others.
The goal is to protect and educate the homeowner and to help him/her decide whether a reverse mortgage is best or otherwise.
What is assessed in a Financial assessment?
Basically, there are two areas that FHA checks in a financial assessment:
- Residual Income – FHA needs to make sure that the borrower has enough money left after paying for expected monthly expenses.
- Credit – Satisfactory credit increases chances for loan approval. If credit is not as blemish-free, the borrower must explain that the case qualifies as an “extenuating circumstance” for the lender to consider approving the loan.
Does the borrower pay for a reverse mortgage counseling fee?
You can receive counseling for free or at a low cost before the loan process begins. You can look for a local HECM counseling professional through the official FHA website.
What is a “set-aside” fund?
A set-aside fund can arise from two circumstances:
- When the borrower voluntarily “sets aside” a certain amount from the loan fund to use for future charges.
- If the lender determines, after a financial assessment, that the borrower will not be able to keep up with the real estate/property taxes and other insurance for the life of the loan.
In the case of the latter, the lender will be authorized to set aside funds which will then be used in the unlikely event that charges and payments aren’t paid in the future.