How Does Reverse Mortgages Program Work
How Does Reverse Mortgages Program Work? – The Ultimate Guide
If you’re getting near retirement age you may have come across this financial product. Just about everyone asks the same question, just how do reverse mortgages program work? They continue to grow in popularity and the basics are relatively simple.
A reverse mortgage is designed for senior adults getting near retirement or already retired. Its similar to a conventional mortgage in one respect – it allows you to borrow against the equity that you have in your personal residence.
However, unlike a traditional mortgage where you are required to make monthly payments of principal and interest to repay the loan, with a reverse mortgage, you don’t. As long as you live in the home, none of the mortgages has to be repaid. Not until you sell the home, or it is no longer your personal residence, or the last borrower dies, is the loan repaid.
This program is administered by the FHA and does have certain conditions that must be met.
From a financial perspective, how does reverse mortgages program work?
A reverse mortgage does differ from a conventional mortgage or a home equity loan. The latter two allow borrowing using the equity in your home, and must be repaid over a certain period of time. Not so with a reverse mortgage.
In addition, the borrowers have several choices to make as far as how the loan proceeds can be used. Some like to draw the proceeds and put it in a savings account for some emergency expense. Some seniors, who don’t have enough saved in their retirement account, will draw a certain amount each month to supplement their income.
Some borrowers ask if the money being drawn is taxable income, and the answer is no. You can’t deduct the accruing interest on a reverse mortgage until it’s paid. It should also be noted that the interest accruing on the reverse mortgage is not deductible until it is paid”]. At that time, it may or not be deductible based on the purpose of the borrowed funds. This article explains the new 2018 tax law change
There are a few requirements by the FHA and HUD that must be met. Firstly, if you have any type of federal loan, it can’t be in a delinquent status. In addition, you must have the income or other assets to keep the property in good repair. Along with that, your income must be able to pay the homeowner insurance and real estate taxes.
Should any of the aforementioned requirements not be met, the lender can trigger the loan to be in default, and due and payable.
Several years ago, when the reverse mortgages program was first introduced, some predatory lenders were taking unfair advantage of the elderly, and causing them to lose their homes. Finally, HUD stepped in and plugged up the holes in the system.
Are reverse mortgages a good option?
There are many unique situations that elderly homeowners are in. Many have struggled to repay their home mortgage in full with the expectation of leaving it to their children.
Many others have medical issues that are keeping them in a nursing home and probably can’t qualify for a reverse mortgage.
The secret to being advised of the best options for anyone interested in this financial product is qualified education. The first step is to find an experienced lender in this field who will be able to guide you through the entire process successfully.
How does one qualify for a reverse mortgage?
- Age – As the borrower, you must be 62 years of age or older. This type of mortgage was intended for senior citizens to enable them to supplement their retirement income.
- Home ownership – To qualify for a reverse mortgage, the deed must be in your name. Any open loans against the home must be repaid from the proceeds of the reverse mortgage.
- Home type – Generally, a single family home or a two to four apartment building, provided one of them is your personal residence, will qualify. In addition, condos and co-ops provided they meet certain requirements of the FHA and HUD. Income producing properties generally don’t qualify.
- Required counseling – All applicants for a reverse mortgage, with no exceptions, will have to meet with a HUD-approved Home Equity Conversion Mortgage Counselor. At this meeting. your options and the various financial requirements will be explained. Any questions you may have will be addressed as well
- Residency requirement – The home that you intend to place a reverse mortgage on must be your principal personal residence. Any other domicile where you live for twelve months or more could trigger a default.
There are situations where taking out a reverse mortgage might not be your best option. Before doing so, talk with a qualified counselor and ask the question how do reverse mortgages work and is it my best option?
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31 responses to “How Does Reverse Mortgages Program Work”
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My wife and I were a bit leery when we considered applying for a reverse mortgage. I can recall reading some horror stories because of a few unscrupulous lenders. Apparently the FHA, and others appear to have this problem corrected. We were having high medical expenses that will continue for some time, and our reverse mortgage has allowed us to stay in our home. This is very important to us and we’re very thankful.
I can relate to your issue with high medical expenses too. My wife developed cancer shortly after we retired and we had no choice but to get a reverse mortgage. I didn’t like the high fees, but now we are able to meet our expenses and can stay in our home that we absolutely love.
Thanks for your comment Peter. Sounds like the reverse mortgage has done what it was designed to do. Glad to hear it.
Thanks for an informative and timely article. Our situation is similar to many other senior adults, and that is a lack of retirement money. It’s the story of being house rich and cash poor. We made it a point to repay our home mortgage before we retired and in doing so, we didn’t have enough money put in our retirement accounts. We don’t want to leave our home and so a reverse mortgage may be our answer. We plan to meet with a FHA counselor shortly and will find out if this is good for us.
That’s just what the FHA counselors are for Abigail. Make a long list of questions and make sure they are all answered to your satisfaction.
I don’t usually make comments on web sites, but after reading your article, I would like to express my opinion. A few years ago, my husband and I applied for a reverse mortgage from a lender referred by a good friend. The entire process went so smoothly, I was amazed. Sure, there are fees to be paid, but when you realize that the lender has to wait a long time until they finally get paid, it makes sense. We get a monthly income from the lender that allows us to keep our home and not have to depend on our children for support. For us, it has been a life saver!
Thanks for your comment Eleanor. Yes, under the new FHA guidelines, a reverse mortgage is more acceptable. There’s still a few bugs to work out, but they’re getting there.
I’ve heard a lot of negative comments on taking out a reverse mortgage, and I’m sure some of them are valid points. The comment that I hear the most is that there are high fees to pay up front to the lender. I gave it some thought and came up with a hypothetical case. Suppose a couple needed to supplement their monthly income and had no way to get the additional money. They have a house all paid for, and have two choices. One is a reverse mortgage with the upfront fees to pay and the second way is to sell the house, invest the money, and draw a monthly income from it.
If the home is sold, they then need to rent an apartment with that added expense. At the home sale, say on a home selling for 300,000, they have a Realtor commission for about 21,000 and other selling costs for about 5,000. That’s 26,000 in fees being paid, off the top. That sounds to me like about four times as much in fees being paid as compared to the reverse mortgage. A reverse mortgage is a no-brainer.
Arthur, your comparison is spot on. Under the new guidelines, everyone doesn’t qualify for a reverse mortgage as the bar was raised a bit.
I still have some reservations on reverse mortgages, not so much on the concept, but more to some of the lenders. I can recall a few years ago several elderly people lost their homes using this process. I believe several of them had hooked up with an “aggressive” ( I’m being kind) lender and one of the borrowers was left off the loan because of a much younger age.
If the prospective borrowers are being informed honestly and no more single name loans are being made, then maybe the major problems are solved.
Thanks for your comment David. Yes, years back, there were some very aggressive lenders who would book just about any loan, without any concern for the borrowers. With the new requirement for counseling, that has been cleared up. I personally would like to see the option to take a lump sum withdrawal removed. Some are taking a lump sum out and we hear of that money going quickly, due to scamming and “needy” relatives.
I personally think this can be used by the elderly to supplement their income. Of course, with a reverse mortgage, you can’t deduct the mortgage interest until the loan is finally paid. However, with the new tax law and the higher standard deduction, it probably wouldn’t matter much. Good article.
Thanks for stopping by Lisa. Yes, this program isn’t the answer for everyone, but for those that qualify, it can mean the difference between staying in your home or foreclosure.
My impression is that the most common “good” use of a reverse mortgage is to take out a line of credit early (say 62) and let it grow over time as a protection against running out of money (sequence of returns risk, etc). In this case the only downside risk is the various costs with establishing it and any yearly fees.
Until you take a withdrawal there should be not be any additional cost, correct?
Thanks for your question Benjamin. Yes, it’s my understanding that no further costs would be incurred until a withdrawal is made.
So when you sign-up for a reverse mortgage, you are committing to a high-interest rate, non-deductible, variable rate loan. That sounds kind of bad when you put it that way, doesn’t it?”
Thanks for your comment Ralph. If you base your question solely on the fact that the loan has a higher interest rate than a regular mortgage, yes it would. However, if you consider the fact that the bank is receiving no amortization on the loan and must wait years to get repaid, then no is isn’t bad. Also, if you consider that these terms are standard around the world, then again, no it isn’t that bad. Consider also what is worse, a senior citizen being allowed to use the equity in their home to live on and to stay in their home, or to be evicted and going who knows where? I can see more good points than bad.
It was compelling to know that residents age 62 or older with substantial equity in their home qualify for this type of mortgage. I am nowhere near that age of 62, even though I feel like it. I will be sure to keep myself informed and updated!
Thanks for stopping by Sarah. Glad to hear that you like our post and please come back often.
This is a very good article explaining the reverse mortgage program. Anytime that you make a financial decision, it’s very important to get all of the information and all of your questions answered, before you dive in. Practically all financial programs have pros and cons and there is no “one size, fits all.” The reverse mortgage program is no different…it is not the best thing for everyone.
You’re so right Eugene. Before undertaking any type of financial transaction, get all of the facts, and if necessary, seek professional help.
If at all possible, you need to work with a financial planner or an experienced financial professional before you undertake a reverse mortgage. I also don’t recommend taking a lump sum to hold for your long term use. Without my knowledge, my mother did just that, and almost the entire amount was scammed by so called friends who needed a loan. She’s now in a nursing home and the home was sold by the lender to repay the debt.
Thanks for commenting Marjorie. Your point is well taken and I personally feel that the lump sum withdrawal should not be an option.
For a number of years, my practice as an attorney, is specializing in reverse mortgages. There are probably three main issues with reverse mortgages: (1) A general lack of knowledge by senior citizens who are under the impression that all reverse mortgages have high fees and the bank takes their home. Many times the loan can be tailored to their individual situation. (2) Often times, there is a lack of equity in the home because of the current caps on lending. Because of that, many simply don’t qualify. When the economy tanked years ago, many of them tapped into the equity, and now today, their LTV’s are too high to qualify for a refinance. (3) This one can be really onerous, and that is the heirs. Quite a few of the ones I ran across think the property is their inheritance, and are against any new mortgage liens on the property.
Thanks Gino, for your input. You made some valid points that we all can use.
When dealing with any financial matter, an error can occur, with devastating circumstances. I read an article in AARP that had to do with one. A home was owned by the wife alone and when a reverse mortgage was taken out, both she and her new husband signed the loan document. The wife died and left the house to her children from a previous marriage. They sold the home to repay the reverse mortgage and the new spouse was out.
Thanks for your comment Saul. Some of the old reverse mortgage loans had serious problems. With the new FHA counselors, most of these problems don’t occur.
Just a simple question if I may. My parents want to add an addition to their home by taking out a home mortgage. If, in a few years, they want to use a reverse mortgage, would they qualify since they have an open loan on the property?
Thanks for your question August. Yes, an existing loan won’t prohibit as long as LTV is high enough for new funds, or the borrowers have enough cash on hand to cover it all. The existing loans are paid off when the reverse mortgage is approved.
I bought my home many years ago and it is titled in only my name. If I were to take out a reverse mortgage, and then a few years later I died, would my current wife be considered an heir and then have to sell the home and repay the reverse mortgage?
Thanks for stopping by Howard. Yes, she would be an heir, and would have to repay off the loan to stay in the home. This is the one reason that a married couple should have both spouses on the home and on the reverse mortgage.