A reverse mortgage is an arrangement under which a homeowner may get a loan representing a percentage of home equity. The homeowner will not be required to make payments or repay the loan so long as she continues to reside in her home and keeps taxes and insurance current. Reverse mortgages are more popular than conventional home loans among the retired as there are no income requirements for qualification.
The lender will recover the principal amount of the loan, plus interest, when the home is sold or when the homeowner (and spouse, if any) no longer resides in the home. In addition, the homeowner or her heirs will recover the remaining value of the home, if any, at this time.
The Home Equity Conversion Mortgage
The only federally-insured reverse mortgage is the Home Equity Conversion Mortgage (HECM). The Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development (HUD), guarantees HECM loans. HECM loans are available in all 50 states, the District of Columbia, and Puerto Rico.
Advantages of an HECM Loan
- No income or credit requirements
- If proceeds from the sale of the home are insufficient to cover the amount owed, HUD will pay the difference
- The credit line increases over time; i.e., the amount of available cash increases until all of it has been withdrawn
- Generally provides the largest loan advances of any reverse mortgage
- Offers the most options regarding the structure of loan payments – the borrower has five alternative ways to receive HECM loan payments
- The only reverse mortgages that cost less than HECM loans are generally those offered by state or local governments
Requirements of the Borrower
To qualify for an HECM loan, the borrower must be:
- 62 years of age or older
- A homeowner (either owning the home outright, or maintaining a low mortgage balance that can be paid off at closing with the proceeds from the loan)
- The primary resident of the property
- A participant in a free consumer information session given by an independent HUD-approved counseling agency
Determination of the Mortgage Amount
The following factors influence the mortgage amount:
- The age of the youngest borrower
- The current interest rate
- The appraised value of the home or FHA’s mortgage limits for the area, whichever is less
- Other loan fees
The property must meet the U.S. Department of Housing and Urban Development (HUD) minimum property standards and be at least one year old.