Reverse mortgages are a special type of home loan designed for borrowers 62 years of age or older. Reverse mortgages allow a homeowner to utilize the equity in their home to refinance or extract cash without the burden of monthly payments. These home loans are the reverse of traditional mortgage loans in which the borrowers makes preset payment amount to repay the loan. With a reverse mortgage, there are no monthly payment obligations.
Unlike traditional mortgage loans that have predetermined monthly payments, the homeowner’s obligation to repay a reverse mortgage is deferred until the owner dies, the home is sold, or the owner leaves the property. With a reverse mortgage, the borrower is not obligated to make monthly mortgage payments for as long as they stay in the home. The reverse mortgage loan is repaid only after the borrower permanently leaves the home.
With a reverse mortgage, homeowners can choose how they want to use the equity in their home as either a fixed monthly payment, a one time distribution, a line of credit or a combination of those options.
The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM) which is an FHA mortgage loan offered by FHA approved mortgage lenders. With an HECM reverse mortgage loan there are different options on the interest rate, how much money that is made available to the borrower, and how the payments to the borrower are made. HECM reverse mortgages can be based on variable interest rates or fixed interest rates.
The mortgage lender that makes the reverse mortgage will recover the principal amount borrowed, plus accrued interest, when the home is sold. After the property is sold, if there is a remaining value after the reverse mortgage is paid off, the home or the remaining value goes to the borrower or their heirs.
In situations where the sales proceeds of the home are not sufficient enough to pay the reverse mortgage amount owed, with the FHA reverse mortgage, the mortgage lender will be paid in full by the FHA. FHA collects an insurance premium from all reverse mortgage borrowers in order to provide insurance coverage for loss of principal and interest to the mortgage lender.
In order to obtain an FHA insured reverse mortgage the borrower must be 62 years of age or older, occupy the property as your principal residence, not be delinquent on any federal debt, complete a counseling session given by an approved HECM counselor.
The loan amount for the reverse mortgage is based on the existing mortgage amount on the property, the age of the reverse mortgage borrower, the current interest rate and the lesser of the appraised value or the HECM FHA reverse mortgage limit.
Since there is no repayment schedule with these home loans, there are no income or employment qualifications requirements for the reverse mortgage borrower. The FHA reverse mortgage HECM does not require repayment as long as the home is your principal residence and the obligations of the mortgage are met.