What is a Reverse Mortgage and Eligibility Requirements

By Miranda Marquit, on April 13, 2012

One of the retirement planning tools that has become more popular in recent years is the reverse mortgage. More and more seniors are turning to the reverse mortgage to help them tap the equity built up in their homes. But what is a reverse mortgage? And is it always the best option? Before you get a reverse mortgage, it’s important that you consider all your options, and understand the implications of a reverse mortgage.

Photo by 401K via Flickr

Overview of the Reverse Mortgage

A reverse mortgage is a home loan in which the bank makes a payment to you, based on the equity in your home. With a home equity loan or line of credit, you are required to begin making payments on the loan, repaying the money you borrowed, almost immediately. With the reverse mortgage, though, you receive the money and you don’t have to make regular payments, or interest payments.

It’s important to understand that you are still charged interest and fees on a reverse mortgage. However, you don’t have to make the payments on your reverse mortgage. Instead, what is owed on a reverse mortgage is repaid when the home is sold. If you no longer live in the home, or if you die, the home can be sold to repay the reverse mortgage (or you might be able to begin making payments). The amount repaid on a reverse mortgage cannot exceed the sale price, so if the home value drops, or if the lender authorized a larger loan, then the lender is out of luck.

You can receive your money as a lump sum, or in regular payments. It’s also possible to take irregular withdrawals, tapping into the home’s equity when you need it, up to the approved loan amount, much like a home equity line of credit.

Eligibility for a Reverse Mortgage

If you decide to get a reverse mortgage, your best option is to get a HUD FHA Reverse Mortgage for Seniors (HECM). There are certain protections built in to these reverse mortgages. However, to qualify, the homeowner must be at least 62 years old, and own the home outright, or have a low enough balance that it is likely to be paid off when the home is sold. Additionally, you must live in the home. If the home is no longer your primary residence, you will have to repay the reverse mortgage by making regular payments, or by selling the home and using the proceeds to discharge the obligation.

Some lenders will offer reverse mortgages to those that are younger than 62, but it’s important to realize that these are not FHA reverse mortgages. Non-FHA reverse mortgages usually come with extra risks and costs.

Understand that your credit score and your income are not issues when it comes to a reverse mortgage. A reverse mortgage decision is made almost entirely on your age, and how much equity is in your home. Reverse mortgages are specifically designed with retirees in mind, so income is not an issue.

Downsides to the Reverse Mortgage

On the surface, the reverse mortgage sounds like a great deal. You’ve spent years building up the equity in your home, and the reverse mortgage is a way to tap it. You don’t have to repay the loan as long as you are living in your house, and you are provided access to money that you might need to fund your retirement lifestyle. It’s important to recognize, though, that there are downsides:

• Interest and fees are often quite high: Remember that interest and fees are still charged. Just because you don’t pay them up front doesn’t mean they aren’t there. Usually, reverse mortgages come with much higher fees and interest than other types of mortgages. The amount you receive will be greatly diminished by the fees and interest.
• You still have other payments to make: A reverse mortgage doesn’t end you obligation to pay property taxes, utilities, and homeowner’s and other types of interest. You still have all of your housing costs to take care of.
• Moving out means repaying the loan: If you end up in a long-term care facility, you might have to begin repaying the loan — even though you are already paying for the cost of the facility. Once the home is no longer your primary residence, the loan has to be repaid.
• Your heirs may not get the house: A reverse mortgage generally reduces the value of the estate you pass on. The home must be sold to repay the loan, and there is unlikely to be anything left over for your heirs. If your heirs want to keep the home, they will have to use money from your estate to pay off the loan, reducing the amount of money they receive.

In the end, many find that reverse mortgages aren’t worth the trouble. However, if you do decide to get a reverse mortgage, look for a FHA HECM.

Leave Your Comment (One Comment)

1. David Sneen says:

   April 16, 2012 at 1:57 am

   For many, a reverse mortgage makes sense. If the house is paid, and the heirs will not want it, it is worth considering. My father-in-law had a reverse mortgage. It did not seem that there was any undue difficulty caused by the mortgage. The house was sold, the realtor paid, and the assets were divided.

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