Seniors who want to use the equity in their homes to supplement their income can use reverse mortgages. A reverse mortgage is a backward loan where the balance the loan grows rather than shrinks over time. This is because the senior is receiving monthly payments that get added to the loan balance.
Qualifying for an HECM
The majority of reverse mortgages in the United States are backed by the federal government and known as Home Equity Conversion Mortgages or HECMs. To qualify, you must be at least 62 years old, living in a property you own, and not owe any federal debt. You may be able to receive a HECM if you still have a mortgage as long as the HECM payout would be enough to cover your monthly payments. However, if what you owe on your mortgage is higher than an HECM payout, you may not be able to receive the loan. You’ll be required to receive a consumer information session prior to taking on a HECM.
How Much Will You Receive?
The amount you receive is based on the appraised value of your home. Typically, you’ll receive between 50% and 70% of your home’s value. The Federal Housing Administration (FHA) does have a cap of $625,000 on the reverse mortgage limit that could reduce the amount you receive. Your age and current interest rates also influence the amount you owe.
HECM Payout Options
If you receive a reverse mortgage, you can receive the payout in a lump sum, line of credit, monthly payments, or a combination of all of them. You are able to change your payment option for a $20 fee.
Repaying an HECM
As long as you live in the home, you do not have to repay the mortgage. Instead, your heirs will be responsible for selling the home or refinancing the mortgage after you pass away. If the home isn’t sold for enough to cover the amount of the balance owed, the FHA will pay the difference.
Your loan may become due in certain other circumstances:
- You fail to pay property taxes or homeowner’s insurance
- You permanently move, or do not live in the home for a consecutive 12 months
- The property deteriorates and repairs are not made
Other than the circumstances listed above, there is no such thing as outliving your mortgage. You won’t have to worry about repaying the loan as long as you live in the home.
10 Things to Know Before Getting a Reverse Mortgage
1. Make sure you understand what a reverse mortgage is. It is not free money. Instead, it’s a loan against the equity you have in your home. The loan isn’t due until you are no longer living in the home.
2. You must be 62 or older, live in a home you own, and have a small mortgage balance or no mortgage at home.
3. You can receive a reverse mortgage even if you didn’t buy your house with an FHA-insured mortgage.
4. Homes must be a single family home or no more than a 4-unit home with the borrower living in one of the homes. Some condos and mobile homes qualify.
5. A reverse mortgage does not have a credit check or income requirements.
6. You don’t make payments on the loan since it’s not due as long as you live in the home.
7. You still have to pay property taxes, insurance, and home maintenance costs. You can use your reverse mortgage proceeds to pay for this.
8. You won’t receive the full value of your home. Instead, you’ll receive a percentage of your home equity up to the FHA max of $625,000.
9. You can receive the mortgage in lump sum payment, a line of credit, fixed monthly payments, or a combination of the above.
You must receive counseling from an HECM approved counselor prior to qualify.
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