HUD FHA Reverse Mortgages benefit senior homeowners with equity in their homes.
- It is a mortgage program that benefits senior homeowners with fixed and/or limited income
- To qualify, the homeowner needs to be at least 62 years old and have considerable equity in their home
- The homeowner will be borrowing against the value of their home
- Homeowners refinancing into a reverse mortgage can receive cash proceeds in one lump sum, fixed monthly payment, or choose to get a line of credit
- Reverse mortgages does not require borrowers to make any mortgage payments
- Homeowners no longer have to worry about making monthly mortgage payments
- So when does the mortgage loan balance come due?
- The entire mortgage loan balance becomes due when the homeowner dies or decides to sell the home
- The younger the homeowner is, the more equity is needed to qualify for a reverse mortgage
- Reverse mortgages are structured where the mortgage loan amount does not exceed the value of the home
- The longer the borrower lives, the higher the loan balance will be
- If the borrower lives a longer than expectant life span, the mortgage balance could possibly exceed the value of the home
- If the mortgage loan balance turns out to be greater than the home’s value, the homeowner’s estate will be responsible for paying the difference of the shortage if the estate decides to keep the home
Instances where the mortgage loan balance is larger than the home’s value is if the value of the property drops or the borrowers lives a long time.
Benefits Of Reverse Mortgages
A large percentage of seniors who have owned their homes for many years often have their homes paid off and/or have a small mortgage loan balance.
- A home is most people’s single largest investment
- Many retired seniors are cash poor but equity rich
- By equity rich, many senior homeowners have most of their net worth tied up in their home equity
- Reverse mortgage enable senior homeowners to tap into the equity they have built up in their homes, get cash out, and not have to worry about making another mortgage payment again until they die
- Proceeds from reverse mortgages are tax free
- With forward mortgages, the homeowner makes the monthly mortgage payment to the lender
- However, with reverse mortgages, the mortgage company makes the payments to the homeowner
- There are various methods of payments the homeowner can choose
- The homeowner is only charged interest on the proceeds the homeowner receives
- As time passes, the reverse mortgage loan balance gets larger and the equity in the home decreases
- This is because the interest is rolled into the mortgage balance because the borrower is not making any payments
The homeowner does not relinquish ownership of the home. The title to the home is still held by the borrower.
How Reverse Mortgages Get Paid Back
Only homeowners who are at least 62 years old or older with substantial equity in their homes can qualify for reverse mortgages.
- The collateral for reverse mortgages is the equity in the homeowner’s home
- Lenders have a set formula where they loan balance will not exceed the value of the home
- The key for the lender is when the borrower dies, the home will get sold
- The mortgage loan balance will be paid off with the proceeds from the sale of the home
- If there are excess funds left over after paying the mortgage loan balance, it will go to the estate of the homeowner
- In many instances, the heirs may want to keep the home of the deceased homeowner
- If this is the case, they need to pay the outstanding reverse mortgage loan balance
- Do lenders ever take a loss on reverse mortgages?
- The answer to this question is YES
- If the reverse mortgage loan balance exceeds the value of the property, the lender will be taking a loss
- The only way this happens is when the property value drops or the homeowner lives a longer life than expected
In the event if the lender takes a loss, HUD will insure and/or partially cover the loss since reverse mortgages are FHA loans.
Qualifying For A Reverse Mortgage