A reverse mortgage is a form of equity release (or lifetime mortgage) available in the United States. It is a loan available to seniors aged 62 or older, per HUD, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves. The owner can be out of the home for up to 364 consecutive days (i.e., into aged care).
In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term the mortgage has been paid in full and the property is released from the lender and becomes fully and solely owned by the homeowner. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month.
If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home in some areas. However most lenders do not like to take a second or third lien position behind a reverse mortgage because its balance increases with time. It is rare to find reverse mortgages with subordinate liens behind them as a result. A reverse mortgage may be refinanced if enough equity is present in the home, and in some cases may qualify for a streamline refinance if the interest rate is reduced.
A reverse mortgage lien is often recorded at a higher dollar amount than the amount of money actually disbursed at the loan closing. This recorded lien is at times misunderstood by some borrowers as being the payoff amount of the mortgage. The recorded lien works in similar fashion to a home equity line of credit where the lien represents the maximum lending limit, but the payoff is calculated based on actual disbursements plus interest owing.
To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age and must occupy the property as their principal residence. There are no minimum income or credit requirements because no payments are required on the mortgage. The proceeds from the loan may be used at the discretion of the borrower and are not subject to income tax payment. While credit is not part of the qualification process a current or pending bankruptcy will require court approval prior to closing. Reverse mortgages follow FHA standards for property types, meaning most 1-4 family dwellings, FHA approved condominiums and PUD's will qualify. Manufactured housing qualify based on standard FHA guidelines.
Before starting the loan process, applicants must take an FHA approved counseling class and present a certificate of completion of the course. Department of Housing and Urban Development (HUD). The counseling is meant to serve as a safeguard for the borrowers and to ensure they completely understand what a reverse mortgage is. The maximum lending limit varies by county, but may not exceed $625,000.00. The loan size a borrower qualifies for is determined by the borrower's age, the value of the home, and the home's location.
If you're interested in learning more about a reverse mortgage check out this Reverse mortgage loan calculator.
