Reverse Mortgage

A reverse mortgage is a secured loan for elderly homeowners whereby instead of them making payments toward repayment, the lender makes payments to them.

This is a program meant to help senior in retirement who no longer have an income to have access to cash that is borrowed against home equity.

The borrower keeps the house for residence, and gets to receive a recurring cash payment.

As the debt rises, the homeowner will not need to repay it until either he:

  • Dies
  • Sells the home
  • Move out
  • etc

After which, the property is sold and the sales proceeds used to pay off the debt totally.
Any surplus will be given to heirs or depending on any instructions in a legal will.

Heirs can also choose to pay off the debt and keep the property for themselves.

Suffice to say, the amount that can be borrowed will heavily depend on the value on the property and any outstanding mortgages against it.

More factors that determine the amount are:

While a typical forward mortgage requires the borrower to make monthly payments towards it, by the age of 62, the borrower will be eligible to “reverse” the process and receive payments from the bank instead.

These payments can be in the form of:

  • Monthly checks
  • Lump sum of cash
  • Credit line
  • Any combination of the above
  • etc

For longevity, the option of monthly payment tend to be a more pragmatic approach.

Eligibility

To be eligible for such mortgages, an owner must be at least 62 years of age and the home must be his permanent residence.

Since there is no payment obligations to meet, there are need for credit records and credit scoring.

However, lenders are obligated to provide a Good Faith Estimate and

What is required from the borrower, is for him/her to attend some kind of counseling so that they know what they are doing and won’t spend away the money like there’s no tomorrow.

No all classes of property types qualify. But generally the below are safe:

  • One family house
  • One family apartment
  • Condominium units
  • etc

Mobile homes for example, will not qualify for reverse mortgages.

Should house have an existing mortgage, the borrower has to agree to repay it with the proceeds from the reverse home loan.

Either that, or the first mortgage lender will have to agree to subordinate it’s lien to second-priority behind the reverse mortgage lender.

This can present the biggest hurdle to a borrower.

Limited liability

Under reverse mortgage programs, borrowers retain the right to live in their homes regardless of how much the debt accumulates.

This is even if property value crashed below the total amount owed.

When this happens, the lender will just have to take the loss on the chin unless it is an FHA special program.

In that case, FHA will reimburse the lender since the borrower has insurance.

In addition to that, what’s really attractive in these reverse mortgage loans is that lenders have no recourse.

This means that should proceeds from the sale of the property be insufficient to pay off the debt, the lender has no legal right to pursue other assets owned by the borrower of hold their heirs liable.

However, under certain conditions lender can demand full repayment if:

  • Failure to pay property tax
  • Failure to pay insurance premiums
  • Change in names on title
  • Takes on a second mortgage
  • Use the house for business
  • etc

The purpose of such loans is to help cash-strapped elderly homeowner in retirement.
This is why the above provisions are required.

The biggest reverse mortgage program by far is FHA’s Home Equity Conversion Mortgage (HECM).

Another one of note is Fannie Mae’s Home Keeper Mortgage.

Finally, a reverse mortgage is a great way to enjoy the fruits of your labor over the decades spent contributing to the economy.

So one should feel any guilt in cashing in on the house.