If you’re retired or planning to retire soon, you may be considering a reverse mortgage to pull equity from your home. This type of home loan does not come with a monthly mortgage payment, and you can use the cash you receive to supplement your retirement income. Here’s what you need to know about reverse mortgages, how they work and the requirements you’ll need to meet to get approved for a loan.
What is a Reverse Mortgage and How Does It Work?
A traditional mortgage lets you purchase a home and repay the lender’s principal and interest in monthly installments over a 10, 15, 20 or 30-year period. If you take out a reverse mortgage, though, the opposite happens.
This loan product lets you borrow against your home equity. The lender will pay off your current loan and make payments to you from your remaining equity over time through a line of credit or in a lump sum, and you’ll get to stay in your home without making monthly mortgage payments. Furthermore, reverse mortgages aren’t payable unless you decide to relocate.
When you pass away, the lender will sell your home and apply the proceeds to the outstanding loan balance. If your home sells for less than you owe, your heirs won’t be responsible for paying the difference. And if there’s a profit on the sale, the remaining profits after the loan is paid off are distributed to your estate. But if your heirs wish to keep the property, they must pay off the loan to take possession of the property from the lender.
What are the Requirements for a Reverse Mortgage?
There are a few variations of the reverse mortgage. However, the home equity conversion mortgage (HECM) that’s insured by the Federal Housing Administration (FHA) is the most common option amongst seniors.
You’ll need to meet certain age, home ownership, home equity, residency, and counseling requirements to be considered for a HECM.
Typical Reverse Mortgage Requirements
Below are some reverse mortgage requirements to be aware of per the U.S. Department of Housing and Urban Development’s (HUD) guidelines.
Borrowers must be at least 62 years of age to secure a reverse mortgage. However, if you’re married, and your spouse isn’t yet 62, you can be listed as a non-borrowing spouse. Although they can’t receive the funds from the loan, being classified as such allows the borrower to remain in the home if you precede them in death.
You’ll need to be the owner of your home. It’s not necessary to own it outright, though. A mortgage on the property is acceptable if you have a sizable amount of equity.
You’ll need to have at least 50 percent worth of equity in your home to qualify for a reverse mortgage. To illustrate, if your home is worth $375,000 and you owe $125,000 on the mortgage, you have $250,000 ($375,000 – $125,000) or roughly 67 percent in equity. So, in this case, you’d potentially be eligible for a reverse mortgage.
The home you’re looking to get a reverse mortgage on must be used as your primary residence.
You’ll need to complete reverse mortgage counseling with a HUD-approved counselor before moving forward with the lending process. During your time with the counselor, they will explain how reverse mortgages work, what to expect and share other options that could work for your financial situation.
Home Requirements for a Reverse Mortgage
There are also home requirements you must meet to qualify for a reverse mortgage.
Whether you own a single-family home or multiple-unit property (up to four units), you could be eligible for a reverse mortgage if you reside in the home or a unit in the multiple-unit property.
Manufactured Homes: FHA Requirements
Some manufactured homes are eligible for reverse mortgages if they meet the requirements set forth by the FHA. However, these properties must also be approved by HUD.
Like manufactured homes, condominiums are also subject to the eligibility guidelines set forth by the FHA.
Financial Requirements for a Reverse Mortgage
Borrowers will also have to adhere to these financial guidelines to keep the reverse mortgage in good standing. Otherwise, you risk the outstanding balance becoming due and possibly losing your home if you’re unable to pay it in full.
Even though you’ll no longer make monthly mortgage payments, property taxes are still your responsibility when you take out a reverse mortgage.
Along with property taxes, you’ll also be on the hook for homeowners insurance payments.
You’ll also need to keep up with home maintenance and repairs, as the responsibility for these duties does not fall on the lender.
Other HOA Fees
The other financial requirement you’ll keep as a reverse mortgage borrower is the HOA and CDD fees you’ll pay if you live in a deed-restricted community. Otherwise, you can disregard this expense.
No Federal Debt Delinquency
If you are delinquent on any debts owed to federal agencies, you won’t be eligible for a reverse mortgage.
Note: Be mindful that single-purpose reverse mortgages and proprietary reverse mortgages also exist. Some of these eligibility requirements don’t apply, so you’ll need to inquire with the lender to learn more about what you’ll need to qualify.
How to Get a Reverse Mortgage
To apply for a reverse mortgage, you’ll follow the same process as you did when applying for your current mortgage. Start by inquiring with the lenders you’re considering to determine if you meet the eligibility criteria. If so, select the best option, complete the loan application in its entirety and submit any documentation the lender requests.
The underwriter will review your application and supporting documentation to determine if you’re a good fit for a reverse mortgage. It’s important to note the underwriting process involves conducting a title search to confirm the property is free and clear of liens, along with an appraisal to determine the fair market value of the property. You can also expect to undergo a hard credit check.
Disbursement of funds generally takes place within a few days of closing. Borrowers have the option to receive a lump-sum payment or monthly installments – for the latter, and the payments usually stop if you sell your home or pass away. Or you can opt to get access to a line of credit that grows as time progresses.
In most instances, there are no spending restrictions. This isn’t always the case, though, and it’s worth inquiring with the lender to avoid breaching the contractual agreement between you and the lender.
Consider contacting Top Flite Financial, a full-service mortgage lender and a leading originator of these Home Equity Conversion Mortgages (HECM) backed by the federal government. They are a reputable lender, accredited by the Better Business Bureau (BBB) with an A+ rating. Complete this online form to request a free consultation with a Top Flite reverse mortgage expert.