Signature RM Blog

Reverse mortgages: the basics

Who's eligible? Reverse mortgages are loans secured by the home that do not need to be repaid until the borrower dies, sells the home or moves out permanently. To get a reverse mortgage, you must be at least 62 years old and own your home, which must be your primary residence. There are no income requirements. It's OK to have an existing mortgage, but you must be able to get enough from the reverse mortgage to pay it off. You remain responsible for home maintenance, taxes and insurance.

What's the process? You need an appraisal and inspection, just as you do for a traditional mortgage. Counseling is mandated for government loans. "It's important to completely understand how the loan is structured," says Linda Altman, president of Customer First Mortgage in Orange Park, Fla.

What are the loan options? There are two basic types of loans: the HECM, which accounts for 90 percent of the market, and private reverse mortgages without federal mortgage insurance. "The HECM is still the gold standard," says Shelley Giordano of Wells Fargo Home Mortgage. "It's the most versatile product and best for most people."

HECM loans are insured by the U.S. government; with a private loan the lenders assume the risk. You can never owe more than the value of the home when it's eventually sold—if the value declines, the shortfall is covered. The main drawback of a HECM is that the Federal Housing Authority caps the appraisal, which affects the loan amount. Currently, the loan limit differs from county to county, from $200,160 to $362,790, but Congress may raise that to a single national limit of $417,000, or even higher.

Borrowers with more expensive houses sometimes turn to private loans, even though the costs may be higher. Ron and Carolann Prast of Scottsdale, Ariz., wanted to get out from under the weight of their monthly mortgage payment. They turned to Bank of America when they were told that a HECM would give them only about 45 percent of their home's $540,000 value. "With Bank of America we got about 65 percent," says Prast, 74, who continues to work part time as an accountant.

How much can you get? That depends on the home's value, location, interest rates and the age of the younger borrower if there are co-owners. You won't get anywhere near the appraised value of your house—expect between 50 and 70 percent. What's more, appraisal and legal fees, origination fees, mortgage insurance premiums and monthly service fees come off the top.

The loan can be taken in a lump sum, as monthly payments, as a line of credit or as a combination of these options. Untapped funds in a line of credit generally increase, allowing homeowners to borrow more money over time.

Reverse Mortgages are almost completely misunderstood. Years ago, before Reverse Mortgages were heavily regulated, many private Lenders deceitfully took the title in Senior's homes or had appreciation clauses, in which the lender also took a percentage of the appreciation of the home in addition to the balance owed.

Due to these dishonest practices, the federal and state governments stepped in to regulate Reverse Mortgages and developed new loan programs.

Since the late 1980s, Reverse Mortgages have become the most regulated mortgage loan programs in the country. The distasteful practices of some lenders over twenty years ago have lead to many myths and misunderstandings of today.

These are common myths on Reverse Mortgages:

Myth #1 – The Bank Owns Your Home.

This is the most common misconception. You own your home and keep title as long as you own your home, just as you did or are still doing with your traditional mortgage. Once you permanently move out of your home or pass it on to your estate, the loan must be repaid. A Reverse Mortgage is to be paid when a property is sold. You keep the net proceeds from the sale of the property just as you normally would with any real estate sale. The Bank never wants to own your house.

Myth #2 – You Must Own Your Home “Free and Clear” to Qualify For a Reverse Mortgage.

You need to have equity in your home as it is the equity you are borrowing against. One of the benefits of a Reverse Mortgage is that it can be used to payoff your current mortgage so you can live payment free. You can even use a Reverse Mortgage to purchase a home and live payment free.

Myth #3 – You Won’t Qualify Because of Poor Credit.

A Reverse Mortgage works differently than a traditional mortgage. As you do not make any payments as long as you live in your home, your credit history is not important. You can even use a Reverse Mortgage to pay off a bankruptcy or get out of foreclosure and save your home. More Seniors find themselves in desperate finances than you may think; as fixed income has not been increasing nearly as fast as the cost of health care, electricity, property taxes, home insurance, car insurance, etc., has been rising.

Myth #4 – You Don’t Have The Income To Qualify for a Reverse Mortgage.

Reverse Mortgages work the opposite of traditional mortgages and give you income versus using your income to make mortgage payments. Traditional mortgages require that you have the income to qualify for the loan, as you must make monthly mortgage payments to the Bank to pay the loan back. As you do not make any mortgage payments with a Reverse Mortgage until you leave your home, you do not need income to qualify. With a Reverse Mortgage, the Bank pays you versus you paying the Bank.

Myth #5 – You Will Not Have An Estate Left For Your Heirs After The Reverse Mortgage Is Paid Off.

This situation is almost impossible. The formula used to calculate the Reverse Mortgage loan amount you qualify for was developed by and with the federal government, and is very conservative to insure that this doesn’t happen. Many borrowers first worry about a Reverse Mortgage bleeding the equity in their home dry, later wish they could get more money once they understand the conservative figures. However, these formulas are as a protection for you and the Bank. As Reverse Mortgages are non-recourse loans, you can never owe more than the value of the property.

Myth #6 – If You Owe More Than Your House Is Worth, Your Children Have To Pay It Off For You.

Reverse Mortgages are non-recourse loans as a protection measure for both you and your heirs. Unlike traditional mortgages, where you owe the balance regardless of the value of your home, you and your heirs are never responsible for more than the value of the home no matter how much you owe. The chance that your balance with a Reverse Mortgage will exceed your home value is very unlikely. There would need to be a drastic reduction in property values for this to occur.

Myth #7 – Once You Use Up Your Equity, They Cut Your Payments Off.

It is unlikely that your loan balance will be more than the value of your home. Even if your loan balance is more than the value of your home, the Bank must continue to make payments to you with the government insured Reverse Mortgage programs. If you lived to be 150 years old, or your home became worthless, the Bank is still required to keep making payments to you as long as you live in your home.