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Reverse Mortgages Explained

Reverse mortgages explained
reverse mortgage

What are the rules of a reverse mortgage?

Reverse Mortgage Rules & Requirements
  • You must be 62 years of age or older.
  • You must own your home.
  • You must own your home outright, or have a substantial amount of equity.
  • You must live in the home as their primary residence.
  • You must complete a financial assessment.

Is a Reverse Mortgage Expensive?

Home equity conversion mortgages (HECMs), the most common type of reverse mortgage, bring a number of one-time fees and ongoing costs. The most significant of these are origination fees, closing costs, and mortgage insurance premiums, along with the interest the borrow accumulates on the loan balance.

When Do You Have to Repay a Reverse Mortgage?

The lender will require the borrower to repay the reverse mortgage if the borrower does any of these things:

  • sells the home
  • resides outside the home for more than a year
  • passes away
  • fail to maintain the property
  • stops paying your homeowners insurance premiums or property taxes

There are some exceptions to these rules for eligible non-borrowing spouses who want to keep living in the home after their borrowing spouse passes away.

Reverse mortgage loans typically must be repaid either when you move out of the home or when you die. However, the loan may need to be paid back sooner if the home is no longer your principal residence, you fail to pay your property taxes or homeowners insurance, or do not keep the home in good repair
If you’re 62 or older – and want money to pay off your mortgage, supplement your income, or pay for healthcare expenses – you may consider a reverse mortgage. It allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills.
Usually, borrowers or their heirs pay off the loan by selling the house securing the reverse mortgage. The proceeds from the sale of the house are used to pay off the mortgage. Borrowers (or their heirs) keep the remaining proceeds after the loan is paid off.
The answer is yes, you can lose your home with a reverse mortgage. However, there are only specific situations where this may occur: You no longer live in your home as your primary residence. You move or sell your home.
Allow foreclosure: Heirs are not held responsible for a reverse mortgage loan and can walk away from the property without owing anything. As mentioned earlier, if the home is worth less than the loan amount, that is the lender’s responsibility and why a borrower pays into a federal insurance fund.
When you take out a reverse mortgage loan, the title to your home remains with you. Most reverse mortgages are Home Equity Conversion Mortgages (HECMs).
A reverse mortgage is commonly paid back by using the proceeds from the sale of the home. If the loan comes due because you’ve passed away, your heirs will be responsible for handling the repayment and will have a few options for repaying the loan: Sell the home and use the proceeds to repay the loan.
At the end of the reverse mortgage, you have to pay the loan with interest. But, until you are alive, living in the same house or primary residence of the home you don’t need to repay the loan. The reverse mortgage is repayable after your death or you move out of the home permanently.
There are several kinds of reverse mortgage loans: (1) those insured by the Federal Housing Administration (FHA); (2) proprietary reverse mortgage loans that are not FHA-insured; and (3) single-purpose reverse mortgage loans offered by state and local governments.
Reverse loans don’t require monthly payments, as the full balance comes due when the last borrower dies or leaves the home. But reverse mortgage interest rates are still a big deal and should factor into your clients’ borrowing decisions.
Assuming a mortgage

After you secure ownership of the home, reach out to the lender and let them know you inherited your father’s house. They can walk you through the process of assuming the mortgage. They may require you to provide proof of your father’s death and that you’re the legal owner of the property.
You are not required to make monthly payments on the reverse mortgage because the loan balance doesn’t come due until the final borrower moves out of the home, passes away, fails to pay taxes or insurance, or neglects to maintain the home.
Borrowers are responsible for paying property taxes, homeowner’s insurance, maintenance, and related taxes (which may be substantial). We do not establish an escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases.
A reverse mortgage loan does not require any monthly mortgage payment, so the interest is added to the outstanding loan balance monthly. Interest only accumulates on the actual balance. If a borrower has an available line of credit interest does not accrue on that amount.
Yes – If you’ve paid off your entire mortgage or purchased a property with cash outright, then the property is unencumbered. An unencumbered remortgage is a term used for a mortgage on an unencumbered or mortgage-free home.
62 and older
Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage loan, are a special type of home loan only for homeowners who are 62 and older. For proprietary reverse mortgages, the age can be as low as 55.

Home Equity Conversion Mortgage (HECM)

A Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage, is a special type of home loan only for homeowners who are 62 and older. A reverse mortgage loan, like a traditional mortgage, allows homeowners to borrow money using their home as security for the loan.
If inheriting a mortgaged home from a relative, the beneficiary can keep the mortgage in that relative’s name, or assume it. However, relatives inheriting a mortgaged house must live in it if they intend to keep its mortgage in the deceased relative’s name.
So, the normal term of a reverse mortgage is the length of time a borrower remains living in his home after having taken out the mortgage. According to Forbes Magazine, the average term ends up being about seven years.
Since your property must be considered your primary residence, vacation homes and secondary homes do not qualify for the reverse mortgage loan. In addition, homes on income-producing land, such as a farm, are not eligible. A reverse mortgage loan must be the primary lien on your home to qualify.
There is no minimum credit score requirement for a reverse mortgage, primarily because the main thing lenders want to know is whether you can handle the ongoing expenses required to maintain the house. Lenders will, however, look to see if you’re delinquent on any federal debt.
A reverse mortgage can’t be transferred to another borrower. However, co-borrowers on the mortgage can keep it and remain in the home. Certain non-borrowing spouses are also eligible to remain in the home, although they won’t receive further payments from the reverse mortgage.
As long as you or your spouse live in the house, you cannot outlive your reverse mortgage. The loan is not due until the last homeowner leaves the home permanently or passes away.
No, reverse mortgage payments aren’t taxable. Reverse mortgage payments are considered loan proceeds and not income. The lender pays you, the borrower, loan proceeds (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home.
You could owe capital gains taxes when you or a family member sells your home to pay off the reverse mortgage. What’s important to remember here is that it takes substantial capital gains before you hit the threshold where the IRS is interested. If you’re single, up to $250,000 of home appreciation is not taxable. Always consult with your CPA.
Does a reverse mortgage impact your credit? No. In fact, reverse mortgage lenders don’t typically report to credit agencies. After all, it’s hard to be late on your monthly mortgage payments when such payments are not required.
Yes, it is possible to refinance a reverse mortgage loan. Like a traditional mortgage refinance, you will replace your existing loan terms with new terms.
Borrowers can only have one existing reverse mortgage at a time. However, borrowers who have paid off a reverse mortgage can get another reverse mortgage. And borrowers with an existing reverse mortgage can refinance the reverse mortgage to another one.
A reverse mortgage works best for someone who owes little or nothing on the original mortgage and plans to live in the home for more than five years.
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