Reverse Mortgage Loan Amount: Who Pays Off a Reverse Mortgage?

Reverse Mortgages, Types: Are Reverse Mortgages a Wise Choice?

Old age is quite difficult for many who fail to make proper investment decisions and retirement plans. But does it mean they have to suffer their old age just because of it? Definitely not, because there are still many options available for them in their old age to live a financially independent life. A simple example of this is a reverse mortgage. In reverse Mortgage, senior homeowners get cash from their home without selling it. Isn't it simple?

What is a Reverse Mortgage Loan?

Reverse Mortgage is a special loan available to individuals aged 62 and more. Unlike traditional mortgages, where homeowners are required to make payments in reverse mortgages, lenders pay them regularly, and the money they receive is tax-free. Homeowners stay in their homes, but the loan becomes due after the borrower's death or if he permanently moves out or sells the home.

Key Highlights

  • A reverse mortgage is a financial agreement specially designed for senior citizens, typically about 62 years.

  • In mortgage equity, older people exchange their home equity for a loan.

  • In a reverse mortgage, the borrower either receives a lump-sum, fixed monthly payment or access to a line of credit.

  • The amount borrowed on a reverse mortgage is tax-free, and the borrower can reside in their property until they live.

The loan amount is determined considering factors like the borrower's age, current valuation of the property and interest rate prevailing in the market. The borrower repays the loan after he sells the property or if he permanently relocates or passes away. The lender recovers the principal amount and the accrued interest in these cases. 

Reverse mortgages are quite popular, and the Home Equity Conversion Mortgage (HECM) is a widely favoured type of reverse mortgage. According to the US Department of Housing and Urban Development data, in 2022, the Federal Housing Administration endorsed more than 64,000 home equity conversion mortgages, and the average borrower's age was 74.

Reverse Mortgage Example

The example below will help you understand Reverse Mortgages easily.

Nicole is a 67-year-old retiree in New York with no stable income. But she possesses a property which is valued at $160,000. She opted for a 50-year reverse Mortgage Loan with mortgage insurance. After this, the property is valued at $240,000. Now, she owns a lender with a debt of $200,000. 

The possible outcomes:

1- If Nicole passes away

 Her successors have the option to retain the property by paying $200,000 to the lender.

 Alternatively, the lender can sell the property, get $200,000, and disperse the remaining $40,000 surplus to Nicole's children.

2- If Nicole chooses to sell the property

After repaying the total amount of $200,000, Nicole can use the remaining surplus of $40,000.

3- If Nicole permanently relocates

 The lender is now authorised to sell the property and reclaim $200,000. Also, the lender is obliged to return the remaining $40,000 to Nicole.

How does Reverse Mortgage Loan work?

In a reverse mortgage, the lender usually looks for a homeowner with substantial equity, typically at least 50% of the property's value or full ownership. If he needs cash, the borrower decides to go into home equity and seek help from a reverse mortgage counsellor to look for a suitable lender and program.

After choosing a suitable loan program, the borrower initiates the application process. Upon these, the lender conducts a comprehensive assessment and thoroughly reviews the property, including its title and appraised value. After approval, the lender proceeds further according to the term to disperse the loan amount as either a lump sum, line of credit or periodic payment.

After completing the funding process, the fund is dispersed according to the loan agreement. Some loan agreements also impose restrictions on utilising funds such as home improvement. The loan continues until the borrower passes away, relocates, or repays the loan. The lender can even sell the property to settle the debt after the borrower passes away. After repaying the loan, any remaining amount is forwarded to the borrower or his heirs. 

Types of Reverse Mortgage Loans

 Most reverse mortgages come under government-insured loans, the same as other government-backed financial products like the USDA and FHA loans. This comes with specific rules like eligibility, underwriting process, funding options and restrictions on how the fund can be used. On the other hand, private reverse mortgages are also used, but they lack the eligibility criteria and lending standards.

Here are the 3 different types of reverse mortgage loans:

1- Single-Purpose Reverse Mortgage:

 They are the least expensive type of reverse mortgage offered by non-profits and state or local governments. The loans here are designed for specific purposes like home repair and improvement and are geographically limited.

2- Home Equity Conversion Mortgages

 The US Department of Housing and Urban Development endorses home equity conversion mortgages. They come at a higher cost than traditional mortgages. However, they are more versatile where borrowers are allocated loan funds for diverse purposes. They can choose from options like lump some disbursement, fixed monthly payments, a line of credit, or a combination. 

3- Proprietary Reverse Mortgage

 These are private loans that are not backed by any government agency. Here, lenders are allowed to establish their eligibility criteria, rates, fees, terms and underwriting processes. Despite having these potential advantages, such as ease of acquisition and faster access to funds, the proprietary reverse mortgage carries the risk of exploitation by unscrupulous individuals who target senior citizens for property equity scams. 

Reverse Mortgage Requirements

 Here are some of the requirements you need to fulfil to get reverse mortgages

Age

 To be eligible for a reverse mortgage, you must be at least 62 years old, and the same applies to your co-borrower, like your spouse. Here, it is also essential to understand that reverse mortgages are designed for those senior homeowners who don't have any source of retirement savings or other income.

Equity

 The applicant must have a substantial equity in their home, typically 50% or more. The property must be a house, condominium, townhouse or any house constructed on or after June 15, 1976.

According to the Federal Housing Authority regulations, individuals who hold shares in corporations instead of owning real estate cannot qualify for reverse mortgages. Corporate housing is quite common in New York, so reverse mortgages for Cooperative Housing are banned. However, in 2022, the state permitted only reverse mortgages for one to four-family residences and condos. The same applies to HECMs insured by the Federal Government and proprietary rivers mortgages. 

Income

 Reverse mortgages stand apart from other home equity loans and home equity lines of credit as they do not impose income or credit score eligibility criteria where applicants are assessed based on their income and credit score. Therefore, income and credit score are not prerequisites for reverse mortgage eligibility.

Counselling

 Every applicant for a reverse mortgage, particularly for the home equity conversion mortgage program, must undergo a counselling session sponsored by the US Department of Housing and Urban Development. Sessions are designed to provide information about the advantages and disadvantages of getting a reverse mortgage. The counsellor guides them on accessing funds and gives more details about how the loan might impact their eligibility for Medicaid and Supplemental Security Income.

Cost

 Applicants going for a reverse mortgage must understand that they must cover an origination fee and an initial mortgage insurance premium. They get the option to finance these costs by deducting them from their loan disbursement. Any initial cost associated with reverse mortgages can be pretty high, and borrowers must choose whether to pay them directly or use their home's equity to cover the cost.

Consequences

With reverse mortgages, borrowers need to cover property taxes and homeowner insurance. If these payments are neglected, the loan must be repaid, or the borrower moves to a long-term care facility for medical reasons. And the only option left is to sell the house.

What Are the Pros and Cons of a Reverse Mortgage?

Reverse mortgages help people in need, to be able to afford their lifestyle and pay their bills but it also comes with many difficult issues. Such as you can't easily sell your house which has a reverse mortgage loan. Lets discuss in length the pros and cons of reverse mortgage loan.

Pros of Reverse Mortgage

Lowers Pressure on Your Budget

 Many senior citizens face challenges as they don't have any income source to meet up with the repayment process of their loan. A reverse mortgage allows them to access the needed funds without being pressured to repay their loan immediately. 

No Need to Relocate

 Reverse mortgages provide the accessibility to home equity without the need to relocate. This is a good option for homeowners to remain in their current residence and use it to take out a loan.

The Income Is Not Taxable

The IRS considers the money received from a reverse mortgage a loan advance, making it a non-taxable income in most cases.

Flexibility to Use Loan Amount

The borrower has the flexibility to use the money from this loan for anything they need. There are no specific restrictions on how to spend it. Borrowers can allocate the funds to cover daily living costs, pay for medical bills, or address other expenses.

Cons of Reverse Mortgages

Loan Cost

The reverse mortgage requires paying other upfront costs, such as origination fees, service fees, and closing costs. The borrower must also pay the property taxes, HOA fees and insurance.

May Lead to Loss of Property Rights

The borrower must keep up with the required expenses and home maintenance. If the borrower, for some reason, is not able to live in the house for 12 or more months, the lender may sell the property.

The Heirs May Have to Pay the Loan

If any heirs want to keep the borrower's home, they must repay the loan if he dies. They can sell the house and keep the difference if the loan amount exceeds the home value. 

Strict Eligibility Criteria

The borrower must fulfil the eligibility criteria to get approval for the reverse mortgage. This puts the borrower's age at at least 62 years. If a borrower dies, the non-borrower spouse is at risk as she no longer receives the disbursement. 

How Much Money Do You Actually Get from a Reverse Mortgage?

The amount you get from a reverse mortgage depends on your lender and your chosen payment plan. If you opt for HECM, the loan amount is determined by the youngest age of the borrower, the loan interest rate and the appraised value of your home. The appraised value set by FHA is $970,800. It is also important to note that you cannot borrow the total value of your home. Some of your home equity is used to cover the expenses like mortgage premiums and interest.

The age of the youngest borrower influences the loan amount. If the borrower is older, then he may qualify for higher proceeds.

Alternatives to Choosing a Reverse Mortgage Loan

There might be better choices than a reverse mortgage for you. In many cases, borrowers even fail to qualify for reverse mortgages if they are not above 62 years old or don't have substantial equity in their home. You can use other alternatives to get the funding if you fail to qualify for a reverse mortgage.

The other alternatives are

  • Home Equity Loan

  • Home Equity Line of Credit

  • Sell or Lease the Property

  • Borrow Against Life Insurance Policy

  • Use Your Retirement Funds.

Final Words

Many retired individuals rely mainly on the interest from their savings, but income keeps decreasing. Some do get monthly expenses, but they might not be enough. In such situations, a reverse mortgage can be a good solution if any older person finds it difficult to meet their expenses. In reverse mortgages, old homeowners get money from the value of their home in the form of monthly income. This is a great help for those individuals to keep their lifestyle, pay for medical care, and have extra money for emergencies.

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10 Dec, 2023

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