A Basic Understanding of a Reverse Mortgage

A reverse mortgage is a loan for senior homeowners that use a portion of the home’s equity as collateral.  The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time and in most cases, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. In most cases the estate is not personally liable if the home sells for less than the balance of the reverse mortgage. To be eligible for a reverse mortgage, the Federal Housing Administration (FHA) requires that all homeowners be at least age 62. The home must either be owned free and clear, or all existing liens must be able to be satisfied (paid off) with the reverse mortgage. If there is a mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at the closing. Generally, and in most cases, there are no income or credit score requirements for a reverse mortgage. The homeowner must remain in the home and stay current on all property taxes and insurance.

Basically a reverse mortgage makes it possible for older homeowners (62+) to convert part of the equity in their homes into tax-free cash without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of the homeowner making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the homeowner. There are some restrictions and unique variables which is why it is important to discuss such a program with a professional who specializes in reverse mortgages.

 

Purchasing a Home with a Reverse Mortgage

If you meet the eligibility requirements for a reverse mortgage and the home qualifies, then you may be able to purchase a home using a reverse mortgage. I am finding that some older homeowners would like to make a move to one of the retirement communities (i.e. Del Webb in Roseville, Lincoln, Elk Grove or Manteca) but those communities may exceed their affordability. In other words the sale of their existing home may not provide enough cash to purchase a replacement home and the idea of taking on a new mortgage doesn’t seem appealing when facing retirement. This is where purchasing with a reverse mortgage come into to play. In most cases the required down payment on a reverse mortgage falls somewhere between 35-45%. On a 300,000 home this equals to 105,000 to 135,000 for the down payment. There are also fees involved and it is wise to consult a professional who specializes in reverse mortgages. If you would like to discuss whether you would qualify for a home purchase using a reverse mortgage and or how to evaluate the feasibility of selling your home and purchasing a replacement home using a reverse mortgage, then please contact me.