Retirees with limited income have an incredible financial supplement available to them, provided they're a homeowner. It's called a reverse mortgage, and it continues to be a viable option that allows seniors to remain home, mortgage free.
Reverse mortgage benefits
Reverse mortgages offer seniors (62 years and older) the opportunity to turn some of their home equity into cash. The amount of available cash depends on current interest rates, the age of the youngest borrower, and the appraised home value. Typically, older borrowers with high valued homes are eligible to borrow the most. Regardless of the amount, money received can be used however the borrower chooses.
There are no loan payments while you (or an eligible spouse) live in the home. But you do have to pay taxes, insurance, and maintain the home. The loan becomes due once eligible borrowers have passed away or moved out of the home. The home will be sold (or loan refinanced) to pay for the loan. You'll never owe more than it's worth. So, your heirs don't have to worry about covering costs.
To receive reverse mortgage funds, qualifications must be met, including:
Must be 62 years or older
Live in the home as your primary residence
Own the home and meet financial requirements
If qualifications are met, a borrower can learn more about eligibility, mandatory counseling, application, loan processing, underwriting, and closing.
Reverse mortgage counseling
Reverse mortgage counseling is a requirement. This is because seniors are often on a fixed income. Since the loan involves such a valuable asset — your home — it is crucial you receive guidance from a third-party counselor with the Department of Housing and Urban Development (HUD).
The counselor will explain reverse mortgage costs and alternative options. They will even review loan comparisons that you receive from lenders. However, they will not advise you on which program to select. Instead, they will provide clarity and more information so you can make an educated decision.
Application, processing, and underwriting
The process starts with choosing a lender. Expect to provide personal information and financial statements. Lenders will examine all of your income sources including pensions and retirement plans, not to mention your credit history. They do this to ensure you can keep up with property taxes and insurance.
You'll also discuss fees and closing costs. Expect to pay an origination fee, mortgage insurance premium, appraisal fee, title insurance, etc. Many of these fees were charged when you originally took out a mortgage.
At any time during the application process, you can change your mind without repercussion. Remember to ask questions as they come up and to read through paperwork and disclosures.
Once the application is complete, the appraisal, processing, and underwriting stages begin — getting you one step closer to funding. Underwriting is a key stage as it involves verifying all information to ensure the loan is compliant with HUD/FHA guidelines. Once approved, you can begin the closing process.
Closing on a reverse mortgage
During the closing process, you will carefully review and sign all loan documents to make sure the interest rates, fees, and proceeds are as discussed. Once this is complete, and the three day right of rescission has passed, you can receive your reverse mortgage funds.
Note: the three day right of rescission is your final chance to cancel the loan. Be sure to ask your lender for instructions on this process.
Otherwise, funds can be received in one lump sum, as fixed monthly payments (paid out the first of each month), or can be used to pay off your current mortgage debt. The disbursement of funds is often decided during the application process.
The lender will discuss which fees and charges are mandatory. You will be charged an initial mortgage insurance premium (MIP) at closing. The rate is dependent on your disbursements. Over the life of the loan, you will also be charged an annual MIP.
Recent changes to the reverse mortgage program
In 2017, HUD (under the Trump Administration) determined changes are necessary to improve the financial health of the federally insured reverse mortgage program, which has suffered losses in recent years. Changes include raising premiums and tightening loan limits. The changes — implemented October 2 — apply to borrowers who take out new reverse mortgage loans (current borrowers will not be affected).
These changes can be somewhat complicated to explain and vary from person to person. So it's imperative you speak to a reverse mortgage expert to see how this may affect your loan.