The primary factors include the person’s age (or age of the youngest spouse), home value, and interest rates.
How much can I get?
The amount of funds that a borrower is eligible for depends on the person’s age (or age of the youngest spouse), home value, interest rates and upfront costs. This determines what is available. Once you know how much is available, then you can determine how you would like to receive payment.
The older someone is, the more proceeds he or she may receive. This is an age-driven product, so a person who is 62 will not receive as much as a person who is 80. It works very much like an annuity, based on the person’s projected life span.
To better understand this concept, the lender is advancing an amount of funds that is a percentage of the value of the property, and reserving the remaining value of the property to cover the interest that will accrue over the life of the loan. So therefore if you’re younger, the interest will presumably be accruing over a longer duration of time, so therefore the amount of money you get at first is lower, whereas if you’re older they are presuming that will own the home for a shorter duration of time so the amount of the home’s value that needs to be preserved to cover the interest accrual can be smaller and a larger amount is available.
You can never borrow 100% of their mortgage. So if you have a $200,000 home, you can never receive a $200,000 loan.
A reverse mortgage loan uses a home’s equity as collateral. The amount of money the borrower can receive is determined by the age of the youngest borrower, interest rates and the lesser of the home’s appraised value, sale price, and the maximum lending limit.
Regarding home value, as a rough ballpark estimate, younger borrowers may be able to borrow 50%+ of the property whereas older buyers may be able to borrow 70%+ of the property.
FHA does have an upper limit of $636,150. So if your home is above that number, you will default to the $636,150.
There is a limit on the amount of funds a borrower can access during the first 12 months after closing. If a borrower is eligible for a $100,000 loan, for example, no more than $60,000, or 60 percent, can be accessed. In month thirteen, a borrower can take as much or as little of the remaining proceeds as he or she wishes. There are exceptions to the 60 percent rule. A borrower can withdraw a bit more if there is an existing mortgage, or other liens on the property, that must be paid off. A borrower can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount. That’s an extra $10,000, or 10 percent of $100,000.
There are no specific dollar limits, but you do need a lot of equity to make this work.
How much equity do I need?
You generally need a lot of equity to make a reverse mortgage work. Although there are no specific dollar limits, the best candidates for reverse mortgages have either paid their homes off or they have only a small mortgage balance remaining.
If you do have an existing traditional mortgage, your reverse mortgage pays it off and that balance is incorporated in what you borrow. If you have a significant mortgage balance, this would result in minimal cash out, which may negate the purpose.
You can’t take out all of your equity, but the more you have, the greater the available money from your reverse mortgage.
Typically, you can take about 80 percent of your equity in a reverse mortgage.
You can get a line of credit, fixed monthly payments for a specific number of years, or you can receive payments for as long as you live (in the home).
How do I receive the funds?
Proceeds are typically distributed as fixed monthly payments, a lump sum payment, a line of credit, or a combination of these.
Here is the breakdown:
- Line of Credit: draw as needed up to a maximum amount
- Term Payment: monthly payments for a specific number of years
- Tenure Payment: monthly payments for as long as you live (as long as you’re in the home)
- Modified Term/Line of Credit: combination of term payment and line of credit
- Modified Tenure/Line of Credit: combination of tenure payment and line of credit
- Single Disbursement Lump Sum: a lump sum of cash at closing (typically used to pay off a large mortgage)
Note: The adjustable-rate reverse mortgage offers all of the above payment options, but the fixed-rate only offers lump sum.
You can choose to use the funds however you want, but you’ll need to pay off your existing mortgage first.
How can I use the funds?
Proceeds can be received as a line of credit, lump sum, or monthly payments. Homeowners who have an existing mortgage often use the reverse mortgage loan to pay off their existing mortgage and eliminate monthly mortgage payments. Borrowers are required to continue paying property taxes and insurance and maintain the home.
Many seniors use HECM reverse mortgage loans to supplement Social Security, meet unexpected medical expenses, make home improvements, and more.
For example, you can use the funds to:
- Consolidate and pay debts
- Cover daily living expenses
- Pay for medical expenses
- Help out family members in need
- Save for unexpected emergencies
- Pay for grandchildren’s education
- Buy a new car or pay transportation
- Pay for a vacation and enjoy life!
A reverse mortgage loan becomes due and payable when the last surviving borrower sells the home, moves out, or passes away.
When does the loan become due?
Typically the loan does not become due as long as you live in the home as your primary residence and continue to meet all of the loan obligations. The loan does not generally have to be repaid until six months after the last surviving homeowner moves out of the property or passes away. At that time, the estate typically sells the home to repay the balance of the reverse mortgage and the heirs receive any remaining equity.
A reverse mortgage loan becomes due and payable when the last surviving borrower:
- Sells the home;
- Conveys title of the loan to someone else;
- Passes away;
- Fails to pay property taxes, insurance premiums, condo fees, and other “mandatory obligations,” and all options to bring the loan current have been exhausted;
- Fails to maintain the home and allows it to fall into disrepair; or
- Resides outside of the principal residence for a period exceeding 12 consecutive months due to physical or mental illness.
A borrower can repay the loan balance with proceeds from the sale of the home or by using personal funds to satisfy the debt.
A borrower may choose to make payments on the loan at any time without a prepayment penalty.
Borrowers must repay their loans when they sell their home or die. Under new guidelines, if the older spouse dies, the surviving spouse can remain living in the home without having to repay the reverse mortgage balance as long as they keep up with property taxes and homeowners insurance, and they reasonably maintain the home.
The loan does not generally have to be repaid until six months after the last surviving homeowner moves out of the property or passes away. At that time, the estate typically sells the home to repay the balance of the reverse mortgage and the heirs receive any remaining equity. The estate is not personally liable for any additional mortgage debt if the home sells for less than the payoff amount of the reverse mortgage loan.
Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower (or the borrower’s estate) is generally not required to repay any additional loan balance in excess of the value of the home.
When the reverse mortgage loan does become due, the borrower’s heirs/estate can choose to repay the reverse mortgage loan and keep the home or put the home up for sale in order to repay the loan. If the home sells for more than the balance of the reverse mortgage loan, the remaining home equity passes to the heirs.
No debt is passed along to the estate or heirs. A reverse mortgage loan is “non-recourse,” meaning that if you sell the home to repay the loan, you or your heirs will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.
You use the funds of your reverse mortgage to pay off your existing mortgage.
What about my existing mortgage?
When a person has the proceeds from a reverse mortgage, they have to pay off any existing mortgage that is there.
Just like a traditional refinance — if you have a mortgage on the property, that has to be paid off.
And if you think about, if a person is retired or wanting to retire, and they’re still carrying a traditional mortgage into retirement, that can be quite a burden on folks.
So a HECM reverse mortgage will allow them to pay that off, and if there are any existing funds available, they can use that for any other option that they have.
Unlike a traditional second mortgage, a reverse mortgage “reverses” the flow of payments, so that the lender is paying the borrower.
Is this a second mortgage on my home?
A second mortgage is a loan that’s secured by the value (or equity) in your home. The amount of your equity is calculated by having an appraiser determine the market value of the home. Your equity is the difference between the amount that you still owe on the house, and the market value of the home now.
For example, if your home’s market value is $200,000 and you owe $50,000 on the original mortgage, you have $150,000 of home equity. That equity can be used to finance a second mortgage, which will provide you with cash.
A reverse mortgage basically “reverses” the flow of payments, so that the lender is paying the borrower. Reverse mortgage loans were first introduced in 1989 to allow senior citizens (aged 62 or older) to access a portion of their home equity without having to move. Prior to the development of reverse mortgages, retirees seeking to withdraw that equity had to sell their house or take out a Home Equity Loan (HEL).
Reverse mortgages have special terms that make them attractive to senior citizens. First of all, there are no income requirements for a reverse mortgage, and usually no credit requirements. Additionally, you do not have to make payments on your reverse mortgage as long as you’re living in the home ― reverse mortgages are repaid to the lender when the borrower passes away, permanently moves out, or sells the home.
The principal qualification is that the home is your primary residence.
What types of homes are eligible?
HECM reverse mortgages are for your primary residence, so ineligible properties include investment properties, vacation homes, cooperatives, bed and breakfasts, and new construction without a Certificate of Occupancy. Here is the breakdown:
Homes That Could Qualify:
- Single Family Homes: as long as it’s your primary residence
- Multi-Family Homes: as long as one of the units is the main residence
- Condominiums: those that could qualify are on an approved list by the FHA
- Manufactured Homes: could qualify as long as they are approved by HUD
- Farms on Agricultural Land: calculated with the value of the house
Homes That Do Not Qualify:
- Second Homes: it’s not the borrower’s primary residence
- Vacation Homes: it’s not the borrower’s primary residence
- Mobile Homes: must be considered permanently attached to land
- Co-ops: since they are not secured by real property, but with shares
- Multi-family of 4+ Units: considered commercial property, not residential
Only residential properties are considered for reverse mortgages.
Yes, once you get a reverse mortgage you can sell your home at any time. But when you do, the loan becomes due and payable.
Can I sell my home at any time?
What happens if you want to sell the house before the end of the loan?
You can sell your home at any time, and you can refinance at any time. But when you do sell your home, the loan becomes due and payable.
Remember, the loan becomes due and payable when the borrower moves, sells, passes away, or fails to pay property taxes and insurance, or maintain the property.
Yes, you continue to own the home, as long as you pay your taxes and insurance and maintain the home.
Do I continue to own my home?
There are still a lot of seniors who think the reverse mortgage is a loan where “the bank takes your house and you get a little bit of money.” This is not true. With a reverse mortgage, the borrower always retains title or ownership of the home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property. It’s important to remember that this is a program that is carefully controlled by the government.
As long as you continue living in the home as a principal residence, stay current on taxes and insurance, and maintain the condition of the home, you cannot be forced to move.
Since 1996, CB Investments has helped countless seniors enjoy a stable and secure retirement. To date, our company has processed over $1.5 billion in loans. Our team of reverse mortgage professionals will assist and guide you through every step of the loan process and provide the necessary information to help you make an intelligent decision.
300 Pacific Coast Highway, Suite 301
Huntington Beach, CA 92648
© 2017 CB Investments, Inc.
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