Reverse Mortgage Facts: All You Need To Know

Reverse Mortgage Facts

Reverse Mortgage Facts?

There are many reverse mortgage facts, enough to make anyone’s head spin.

I could have organized this article as a list of fact and make it visually simple.  I chose to organize it by questions people have and insert the facts as they fit in the ansewrs as I think that is more useful to prospective borrowers and their families.

Reverse Mortgage Definition

Reverse mortgages are home loans that do not require borrowers to make monthly mortgage payments.

That’s right, no monthly mortgage payments.  Note, that does not mean borrowers don’t have monthly housing expenses, just that they only have to pay property insurance premiums and property taxes but not principal or interest or mortgage insurance premiums.

Though any lender can, technically have its own reverse mortgage program, most, if not all, reverse mortgages are done through FHA’s HECM.

HECM stands for home equity conversion mortgage.

Are Reverse Mortgages a Good Deal?

The answer is simply, yes, no, maybe. Because, like any other mortgage loan, reverse mortgages are a financial tool designed for specific situations.

If you are in a situation they were designed for, they’re good, otherwise, they’re not or might be (depending on how your situation’s going to change).

Who Are Reverse Mortgages Good For?

They are good for people who have enough income but not by much, people who can afford their existing debts but don’t have much left over or, if they have enough left over, they have ways of using it that yield better results than a reverse mortgage would cost.  Or people who expect to not be able to afford all of their current expenses soon though they will not be so short that they cannot pay property insurance or taxes or general maintenance.

Assuming they have a good chunk of equity.

How Do You Qualify For A Reverse Mortgage?

From now on, every time I write the words ‘reverse mortgage,’ I mean FHA’s reverse mortgage program, HECM.

Since the FHA insures these loans, qualifying is not that hard.  Here are the requirements:

  • at least one spouse must be 62 years old
  • borrowers must first talk to a reverse mortgage consultant (You can search online for a HECM counselor or call (800) 569-4287 toll-free.).
  • there must be enough equity in the home
  • the home is the borrowers’ primary residence
  • the loan amount does not exceed FHA loan limits for the home location
  • borrowers must show enough income to cover property taxes and insurance costs and the costs of maintaining the home
  • you may not be delinquent on federal tax debt
  • the home must be a 1-4 unit building that’s livable (including manufactured homes, if they meet FHA guidelines).  Note: condos must be in FHA-approved projects

(Your loan officer will verify income, assets, monthly living expenses, and credit history as well as  whether you’ve paid real estate taxes, hazard and flood insurance premiums on time. They will hire an appraiser who will not only estimate its value but determine if it’s livable or not. And you will have to have a title company provide you title insurance.)

reverse mortgage factsWhat Do You Need To Apply For A Reverse Mortgage Loan?

  • Copies of driver’s license or government-issued ID’s for all borrowers
  • Copies of Social Security card or Social Security Benefit statement for all borrowers
  • Copy of current mortgage statement (if you have a loan on your home)
  • Home owner’s insurance declaration page
  • Copy of Counseling Certificate signed by all borrowers
  • Income / Asset Documentation for all borrowers

When applicable, you’ll also need:

  • Copy of Trust(s), all pages
  • Power of attorney documents and signed physician’s letter
  • Death certificate

Reverse Mortgage Income Documentation

 

Income Documentation
Hourly/Salary
  • Most recent paystubs for 30 consecutive days
  • Written verification of employment for the last 2 years OR
  • Electronic verification that FHA finds acceptable (talk to your loan officer about this).

If you’ve been with your current for less than 2 years, additional items will be required (your situation determines what).

Self-Employed
  • 2 years of personal federal tax returns
  • 2 years of business tax returns (if applicable)
  • Audited Year-to-Date profit and loss statement
  • Balance sheet (if you own a company, if Schedule C, not needed)
  • Business cred report for all corporation (S-corporations too), if own any.
Social Security Disability / Retirement
  • Most recent award / benefit letter (Lenders want to know how much you get and if you’re going to be getting it for at least 3 more years)

Underwrites may or may not request one of the following:

  • Federal tax returns
  • Bank statements (to see that you get direct deposits from the Social Security Administration
  • SSA-1099 / 1042S form.
VA or Private Disability
  • Most recent award / benefit letter (to determine how much disability you get and if you’re going to get it for at least 3 more years)

The underwriter may or may not require one of the following documents:

  • VA Disability form 26-8937
  • A letter from the private disability insurance provider showing the amount of assistance

How Much Can I Get From A Reverse Mortgage?

The reverse mortgage equity requirements depend three things:

  • the age of the youngest borrower or eligible non-borrowing spouse (the older this person is, the more you can borrow)
  • current mortgage rates
  • the lower of these three: the value of the home (as determined by an FHA-approved appraiser), the sale price, FHA;s mortgage limit for HECM’s (currently $765,500 in 2020).

Refinance a Reverse Mortgage?

Yes, you can refinance a reverse mortgage.  As long as there’s enough equity left in the home and the borrower(s) credit and income and work history allow them to qualify for at least 1 mortgage program.

In times of rapidly increasing property values, people might refinance a reverse mortgage into another one.  Well, the theory allows for that.  Real life?  The value increases would have to be steep!

Best Reverse Mortgage Lenders?Best Reverse Mortgage Lenders

Finding the best reverse mortgage lender for you requires you shop around the same way you would for regular mortgages (called, by the way, forward mortgages).

That is to say, you contact several lenders or mortgage brokers who work with reverse mortgages and get them to tell you what they can do for you at the same time.

Obviously, you would not pick random ones.  It is still best if you work with someone recommended by someone you trust who has good reviews.  It is still best if you remember that good mortgage companies can have bad loan officers.

Reverse Mortgages – Loan Funds

A reverse mortgage loan can have fixed interest rates or ARM’s, amortized the same as forward mortgages.  If you choose a fixed rate reverse mortgage, you will receive the total loan amount in one lump, at closing.

If you choose an adjustable rate mortgage, there are several payment options:

 

Are Reverse Mortgages Expensive?

The closing costs can be rolled into reverse mortgages.

When closing costs are rolled into the loan, borrowers don’t come with money for them out of pocket.  At the same time, the loan funds borrowers get is reduced by the closing cost amount.

Costs of Reverse Mortgages

  • mortgage insurance premiums (initial and annual).  The initial mortgage insurance is 0.5% or 2.5%, depending on how the loan is disbursed.  In addition to the initial mortgage premium, you will pay a yearly premium (for the life of the loan), of 1.25% of the outstanding balance.
  • third party charges (appraisal, title search, title insurance, survey, home inspection (and other types of inspections, if required), recording fee, credit check (and other) fees.
  • origination fee (compensation to the lender / mortgage broker for processing your loan).  Origination fees can be the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% over $200,000 , up to $6,000.  (The limit is set by law, no lender / mortgage broker can charge you more than that to originate your loan.)
  • servicing fees (fees for sending you monthly statements, making sure property taxes are paid, disbursing loan proceeds, etc.  The fee can be as high as $30/month for loans with fixed rates or rates that adjust only one time per year; $35/month if the interest rates adjusts each month.  This fee comes out of your equity, it is added to your loan balance each month.

Reverse Mortgages and Heirs

Reverse mortgage lenders are entitled to get 95% of the value of the property at the time the loan is due.

Heirs of properties with reverse mortgages have the following three options:

  1. Sell the property.  They have to  give the reverse mortgage lender the lesser of the 95% of the proceeds or the amount owed. If the amount owed is 95% of the value of the home or higher, the 5% that does not go to the lender will be eaten up by selling costs. If realtors are used and they require 5%, the heirs will have to pay the other selling costs.
  2. Do nothing. In that case, the lender will initiate foreclosure proceedings and sell the house.
  3. Take over the property through a refinance.  To do so, they must file the proper paperwork with the registrar of deeds. (Inheriting makes them owners, filing with the registrar lets the world, and lenders, know they are owners.) The reverse mortgage lender will get the lesser of 95% of the value of the home or the amount owed.

 

After Reverse Mortgage Facts

You now have all the reverse mortgage facts you need. If you think this loan is for you, your next step is to speak to a reverse mortgage counselor. (You can search online for a HECM counselor or call (800) 569-4287 toll-free.)

The next step will be to shop around, get a bank or a mortgage broker to actually apply for your loan.