A reverse mortgage, or (home equity conversion mortgage) provides a unique financial opportunity for seniors to draw funds against the equity in their home. The loan was designed to provide monthly “income” for individuals, or a lump sum distribution to meet other financial obligations, such as medical bills or home repairs. While borrowers are generally not limited to the usage of reverse mortgage funds, some rules of eligibility still apply.
Am I eligible for reverse mortgage?
There are several qualifications that must be met in order to be eligible for a reverse mortgage loan. These include the following:
- Individual homeowners must be 62 years of age or older
- Married spouses, (whereby one spouse is under 62) will still be eligible, but loan will be for less money
- The home must be an occupied principal residence for at least one of the borrowers
- The home must have sufficient equity to be used as collateral for the specified loan amount
- All property taxes, insurance and homeowner association fees must be kept current, and there must be sufficient income to continue with payments
- The home must be in satisfactory condition and meet the standards of the Federal Housing Administration
- Required repairs must be made before loan closure except in cases where loan funds will be “set aside” to make repairs
- The owner-occupied home must qualify as either a single family residence, multi- family unit (2-4), condominium, townhouse, or (manufactured home newer than 1976)
- Homeowner must meet with a HECM approved counselor to discuss financial options and a repayment plan
- Homeowner cannot be delinquent on any federal debt
- Home mortgage balance must be paid off or low enough to be paid off by reverse mortgage loan funds
How much money will I qualify for?
The amount of money you can borrow against your home’s equity is determined based on FHA calculations. Generally the older you are, the higher the loan amount.
The formula for principal loan amounts takes into consideration:
- Current interest rate available
- A fixed vs. variable rate
- Age of the youngest homeowner
- Lending limits set forth by the Federal Housing Administration
- The home value as determined by an appraiser
- The remaining balance on the first mortgage
A reverse mortgage calculator can help you determine eligibility amounts.
What costs am I responsible for when I apply for a reverse mortgage?
Most of the costs and fees associated with a HECM may be financed as part of the loan. This minimizes the out-of-pocket expenses for the borrower, but also reduces the net proceeds available.
A reverse mortgage includes the following fees and charges:
Mortgage Insurance Premiums—This is an FHA required insurance premium that guarantees the distribution of funds to the borrower and protects the mortgagee’s estate from paying back more than the home’s value. This is a one-time, non-refundable fee that is calculated based on the amount borrowed within the first year in comparison to the overall authorized loan amount.
Loan Origination Fee—The borrower will pay the lender a fee to process the loan. This may not exceed $6000. For homes valued at less than $400,000 the greater of $2500 or 2% of the first $200,000 must be paid, in addition to 1% of the amount over $200,000.
Settlement Costs—These include third-party fees for appraisal, title insurance and inspection, surveys, recording fees and mortgage taxes. These are not limited by dollar amount.
Reverse Mortgage Counseling—These costs are incurred by the counseling agency and may be waived for low-income individuals.
Servicing Fee—Throughout the life of the loan lenders provide services such as, disbursement of funds, sending account statements, and monitoring loans for mandatory payment of taxes and insurances. This is limited to no more than $35 per month depending on the type of loan.
*Before deciding whether or not to finance costs and fees it is important to note that interest and MIP will be added to the loan amount.