Older adults over the age of 62 who are homeowners sometimes need a substantial amount of money to pay off their existing mortgage, pay for healthcare expenses, pay for home improvement services, or supplement their income. Because they own their homes, they could use the equity in their houses to pay for outstanding bills without selling their residence. This process is made possible by the reverse mortgage loan.
Not everyone can, or should, convert part of their home’s equity because the reverse mortgage loan process can be complex. While the money could be helpful for many purposes, including paying property taxes, this type of mortgage can leave fewer assets in the loan borrower’s name.
Below is a helpful guide that explains the essential steps of the reverse mortgage process and everything else you should know about.
What Is a Reverse Mortgage?
A reverse mortgage is a loan program specially designed for senior homeowners that allows them to access a portion of their home’s equity. Also known as home equity conversion mortgages, reverse mortgages give homeowners access to tax-free cash that they can use for any purpose, such as lifestyle improvement and medical bills.
People sometimes confuse a traditional home equity line of credit with a reverse mortgage. The latter option does not require borrowers to make a monthly mortgage payment,* but instead allows for the borrower to defer repayment and increase cash flow on the money borrowed.
A reverse mortgage uses the house as collateral, but the borrower does not have to make monthly mortgage payments.* However, the borrower must pay property taxes and sometimes mortgage insurance premiums. The reverse mortgage period lasts as long as the borrower lives in the home as their primary residence.
If the borrower relocates, they will have about six months to pay the loan balance or sell the property to settle the debt. If the borrower has to receive medical treatment at an in-patient facility, they can do so for 12 consecutive months before they must repay the loan. Any remaining equity goes back to the estate.
The Federal Housing Administration (FHA) requires reverse mortgage loan borrowers to meet the minimum age requirement and the financial eligibility criteria set by the Housing and Urban Development (HUD). The borrower must also pay off the loan balance for their current mortgage if they do not own their home free and clear. While residing in the house, the reverse mortgage borrower must maintain the property and pay all property taxes and homeowners insurance.
How Does a Reverse Mortgage Work?
A reverse mortgage works the way its name suggests. With a typical mortgage, you have to make monthly payments to the mortgage lender. With a reverse mortgage loan, the lender pays you from the equity in your home, and those loan proceeds, plus interest, are paid back when a qualifying event occurs; typically moving out of the home or passing away.
When you get a reverse mortgage, you will receive an advance on your house’s equity. You can remain living in the home and retain the title to your residence. Many seniors who consider taking out a reverse mortgage receive Medicare or Social Security benefits, so they might be hesitant to take out a loan. Luckily, the loan proceeds are not taxable, so they won’t affect any federal benefits you receive.
If you have a spouse who is not a listed borrower for the reverse mortgage, they could stay in the house under certain circumstances if you pass away before repaying the loan.
3 Types of Reverse Mortgage Loans
If you would like to explore reverse mortgages, you have several options to consider. Depending on your needs, you may find one type of reverse mortgage more suitable than another.
Proprietary Reverse Mortgage
Proprietary reverse mortgages work by converting some of your home’s equity into non-taxable cash. It is a private loan that private lenders insure instead of federal or local government agencies. Because a proprietary reverse mortgage is not federally insured, it does not follow the limits and requirements set by the Federal Housing Administration.
Since the loan proceeds originate from the companies that develop them, it is possible to receive a more significant amount on a loan than you would if you were to take out a federally-backed reverse mortgage. In other words, if your home has a high appraised value and a small mortgage, you could receive a large advance through a proprietary reverse mortgage.
Single-Purpose Reverse Mortgage
The most economical loan option is the single-purpose reverse mortgage. Many state and local government agencies and non-profit organizations offer them to homeowners with low or moderate incomes. However, they are not widely available.
As the name suggests, you can only use a single-purpose reverse mortgage for one reason, unlike other loan options that may allow more freedom in how you choose to spend the funds. The lender will outline the details about how you must use the cash. For instance, the lender may require the money to go toward home improvements, property taxes, or vital home repairs.
Home Equity Conversion Mortgage (HECM)
Home equity conversion mortgages are federally-insured reverse mortgages that the Department of Housing and Urban Development backs. Unlike a single-purpose reverse mortgage, you can use a HECM for any reason as long as you qualify to receive the funds.
Before pursuing a HECM, you should know that the following factors will determine how much money you can borrow on your home’s equity, including:
- Loan interest rates
- The house’s appraised value
- Age of the youngest borrower
Getting a HECM also requires reverse mortgage counseling to educate you about the loan’s expenses and financial implications so you can make an informed financial decision.
You have several loan disbursement options with a HECM:
- Fixed monthly cash payments for a specific time
- Fixed monthly cash payment for the duration of your time living in the house
- A line of credit that allows you to draw on the loan proceeds at any time for any reason
- A single lump sum cash disbursement
- A line of credit with scheduled payments
HECMs usually give out higher loan amounts at lower costs than proprietary loan advances. However, there are limits on how much you can borrow from a HECM during the first year, which is the initial principal limit. In most cases, you could get a reverse mortgage and receive up to 60% of your initial principal limit within the first 12 months.
Considerations About Reverse Mortgage Loans
Though reverse mortgages seem simple when you break down the basic definition of the term, getting a reverse mortgage is complicated due to the requirements of reverse mortgage lenders, the Housing and Urban Development Agency, and the Federal Housing Administration (FHA).
Before seeking reverse mortgages, here are some considerations every eligible homeowner should keep in mind:
- Interest Rates Could Change: Most reverse mortgages do not have fixed rates, so the interest rates fluctuate based on the market. You could obtain a HECM as a fixed-interest rate loan, but it may require you to take the proceeds as a lump sum and a lesser amount than if taken as a variable rate loan.
- You Will Pay: Lenders usually charge origination fees and closing costs. HECMs may require a mortgage insurance premium as well.
- Your House Will Incur Other Expenses: Though you won’t have a monthly payment for a mortgage* with this loan type, the resident will have other financial obligations. You must pay property taxes, homeowners insurance, utilities, and more. If you don’t take care of these obligations, the reverse mortgage lender may put the loan in default and force you to pay for it immediately. The lender may also require a financial assessment to set aside money for taxes and insurance premiums.
- The Amount You Owe Will Increase Over Time: Like other loans, a reverse mortgage will have an interest rate that you must pay after the loan term ends. Each month, the interest will increase the balance on your loan. However, you can make payments on the loan at any time, decreasing the balance.
- The Loan Can Use Up Your Home’s Equity: Because a reverse mortgage borrows against a house’s equity, you might have fewer assets to leave to heirs upon your death. However, if you have a HECM loan, your heirs can pay off the loan to keep the house, and they may end up paying less than its appraised value.
How to Pursue a Reverse Mortgage
It’s usually best to shop around instead of choosing the first reverse mortgage option available. Shopping around allows you to compare terms, fees, closing costs, and other considerations from various lenders.
As you shop around for an FHA-approved lender, consider:
- Your Home’s Value: A high-valued home could yield a higher loan amount.
- Fees and Costs: Servicing fees, origination fees, and interest rates vary among lenders, even though insurance premiums are usually equal monthly payments.
- Loan Agreement Repayment Terms: Speak with your financial advisor about the Total Annual Loan Cost rates to see how much a reverse mortgage could cost you each year.
8 Steps of the Reverse Mortgage Process
Knowing your options for a reverse mortgage can be tricky without conducting thorough research. It’s best to take some time to educate yourself about the reverse mortgage process. To conduct your research, you can utilize the Department of Housing and Urban Development and the National Reverse Mortgage Lenders Association (NRMLA), and consult with a reverse mortgage specialist. At Smartfi Home Loans, LLC, we have excellent resources and mortgage specialists to help you explore your options.
2. Reverse Mortgage Lender Selection
After researching what you need to do to qualify and apply for a reverse mortgage, you should select a knowledgeable lender to originate the loan. It is best to contact several lenders to compare their fees and abilities to determine which agency best suits your needs.
Look for companies that are part of the NRMLA, the only professional association for lenders dealing with this branch of home equity loans. NRMLA holds its members to the highest ethical standards, so you can be confident its members are reliable and honest.
Also, browse company reviews on the Better Business Bureau’s website. The BBB site includes company ratings, client reviews, and feedback that you can use to determine the right company for your reverse mortgage needs.
3. Participation in Required Reverse Mortgage Counseling
Once you find a lender, you will need to get your loan documents in order. Part of these include your signed HECM Counseling Certificate, which is proof that you completed the mandatory reverse mortgage counseling with a HUD-approved counseling agency. This will typically need to be done before your home appraisal is ordered by the lender.
Depending on your preferences, you can complete the counseling session in person or by phone. Though you could do the counseling after initiating your loan paperwork or choosing a lender, it is best to wait until you at least have a reverse mortgage lender to work with you. A reverse mortgage specialist can prepare you for the session and provide a list of counselors to assist you.
4. Initial Reverse Mortgage Application
Completing the loan application package legally authorizes the lender to initiate the reverse mortgage loan process. Until the company receives the finished loan documents, they cannot begin the loan process, including working with the title company, scheduling an appraisal for the house, and pulling your credit report.
You might not have a specific timeline to complete and submit your application, but the sooner you turn it in, the smoother the loan process will go. Delays on a reverse mortgage are possible if you have a lien on your home’s title that you are unaware of or if you live in a rural area and have trouble getting an appraisal.
5. Coordination of the Appraisal and Escrow
After submitting the loan documents, including the counseling certificate, the lender will coordinate with an appraiser to determine the value of your house. Appraisal companies follow specific guidelines to determine a property’s value. While the appraisal is underway, the lender will open an escrow account and ensure that your property doesn’t have a federal or state tax lien.
The lender will review all preliminary reports and the loan package. If everything is correct and in order, they will turn everything into the underwriter, who will approve the reverse mortgage. The underwriter will further review the documents and request additional paperwork if necessary.
7. Loan Closing
If the underwriter determines your paperwork meets all the guidelines, they will move your file to the closing department, which issues loan documents. You and your lender will schedule a time to review and sign the loan documents. At that time, you can make sure the origination fee, interest rate, and loan amounts are correct.
If no other paperwork or information is necessary, you can sign the documents and initiate a three-day right of rescission period. During that time, you can cancel the loan without penalty.
8. Disbursement of Loan Proceeds
If you choose to continue the process, you will receive your reverse mortgage proceeds. The lender will wire the funds to a settlement agent with the title company, who will perform a final check to ensure that the property has no liens.
How to Determine if a Reverse Mortgage Is Right for You
There isn’t a definitive yes or no regarding the benefits of reverse mortgages. Only you can determine what is best for your financial future. However, it is best to work with a licensed loan officer to help you decide if your best course of action is a reverse mortgage and, if so, what type.
Begin Your Reverse Mortgage Process With Smartfi Home Loans
Now that you know how reverse mortgages work and the process it takes to receive one, you can get started on your loan today with Smartfi Home Loans, LLC. Our knowledgeable team offers tailored loan options at competitive rates, including FHA reverse mortgages and Smartfi CHOICE for homeowners with higher home values.
For secure home lending solutions, reach out to us at 877-816-6706 and speak with one of our helpful loan representatives today.