Reverse Mortgage Defined Complete With HUD Reverse Mortgage FAQ
The Reverse Mortgage program is often misunderstood due to many of the reverse mortgage misconceptions and myths about the program. Our HUD Reverse Mortgage FAQ will help answer questions, dispel myths, and hopefully help you decide if a reverse mortgage is right for you or your loved one.
Reverse Mortgage Defined
The technical term for reverse mortgage is a Home Equity Conversion Mortgage (aka HECM). A HECM is a unique type of loan that is insured by FHA / HUD. A reverse mortgage allows homeowners that are aged 62 plus to access some of the equity in their home and convert it to tax free money they can actually use. One special, key element surrounding a reverse mortgage is that the homeowner is not required to make a monthly payment for as long as they live (or for as long as they live in their home).
***NOTE #1*** There is now a Reverse Mortgage at Age 60 program. However, it is not available in every state.
***NOTE #2*** While there is NO monthly loan payment due, keep in mind you still need to maintain insurance, taxes, and HOA dues payments.
HUD Reverse Mortgage FAQ Table of Contents:
- Property types and requirements
- Credit Requirements
- General questions
HUD Reverse Mortgage FAQ’s Part 1 – Property Requirements
Question – What property types can be used as collateral for a reverse mortgage program?
Answer – A reverse mortgage can be done on a single family dwelling, a condominium with an HOA that is approved by HUD, a town home, a manufactured home, a modular home, and mixed use properties.
A reverse mortgage can also be done on a 2 – 4 unit dwelling as long as the borrower lives in one of the units.
Question – Can a reverse mortgages be done on my 2nd residence or a rental property?
Answer – No, as of this writing in 2018, a reverse mortgage can only be done on your primary residence.
Question – Does my property have to be in perfect condition to get a reverse mortgage?
Answer – No, your property does not have to be in perfect condition to get a reverse mortgage. However, prior to funding, there cannot be any issues that HUD/FHA would deem to be a health and safety issue. For example, if there were a roof know leak that would be considered a health and safety issue. Or, if there are stairs with 3 or more steps, there must be a handrail. Also, you must have functional smoke detectors and some states require functional carbon monoxide detectors. If you live in an area that is prone to earthquakes like California, then there is a requirement to have two seismic straps on the water heater.
HUD Reverse Mortgage FAQ’s Part 2 – Credit Requirements
Question – Is there a minimum credit score requirement for a reverse mortgage?
Answer – No, There is no minimum credit score requirement. However, there is a financial assessment involved that analyzes your credit and income that determines how your loan may have to be structured.
Question – What Exactly does the financial assessment entail?
Answer – As Far as the credit portion goes, we look at two components. First, we look at your housing payment history and installment payment history for the last two years. Housing payment history would include things like your mortgage payment, property tax payments, and any other housing obligations like HOA dues. Installment payments, are normally things like auto loans and student loans where they have a defined loan term and a defined loan amount.
You can actually be a few days or a week late and it’s OK. We don’t consider you late until you are 30 days late or more. You can have up to two 30 day lates within a 2 year period.
We will also look at your revolving credit history for the last one year. Revolving credit refers to things like A-line of credit or a credit card. You can usually have any number of 30 day lates and still be OK. You are also allowed up to two 60 day lates on revolving items within the last one year.
If you do not pass the financial assessment, you may still be eligible to get a reverse mortgage. However, you may have to have a life expectancy set aside, aka LESA.
Question – Do we look at debt to income ratios like we do on a regular loan?
Answer – No, we do not look at debt income ratios with a reverse mortgage. It’s much easier to qualify. We do, however, Look at your residual income. The number of people living in your home and the zone that you live in determine how much residual income you need to have. Again, if you do not pass the Income portion of the financial assessment, You may still qualify to get a reverse mortgage. You may have to have a LESA though.
Question – What is a life expectancy set aside?
Answer – A life expectancy set aside is similar to an escrow account on a traditional loan. However, since you don’t make monthly payments for the reverse mortgage, you have to front load the life expectancy set aside with funds to pay your taxes and insurance for your life expectancy as per FHA actuarial tables. For example, if you are expected to live for 10 more years and your taxes and insurance are $2000 per year, then we’d have to set aside $20,000 for the LESA.
Question – Can I Do a reverse mortgage if I’ve had a bankruptcy, foreclosure, or short sale?
Answer – Yes, you can do a reverse mortgage after these sort of credit milestones, restrictions will apply and a LESA will likely be required.
HUD Reverse Mortgage FAQ’s Part 3 – General Questions
Question – Who owns my home if I do a reverse mortgage?
Answer – A reverse mortgage works a lot like a regular loan. Similar to a regular loan, you would still own the house. The bank does not go on title and you can still hold title however you wish.
Question – Does the bank get my house after I pass away?
Answer – No, your home will go to whomever you leave it to as per the instructions in your will.
Question – Is the money I get at closing or after closing taxable?
Answer – No, the money you get is not considered income. It’s loan proceeds. As such, you would not pay income taxes. Double check with your CPA just to be sure.
Question – Will Medicare and / or Social Security be impacted?
Answer – No, these programs will not be impacted. However, need based programs like Medicaid, Cash Aid, or SNAP / Food Stamps could potentially be affected.
Question – Can I make payments?
Answer – While you are NOT required to make any monthly payments, you can choose to make payments if you like. Most people don’t, but some people elect to do so to keep the loan balance down.
Question – Are there requirements in terms of how I must use the money?
Answer – No, there are no requirements in terms of how you use the money. The only potential requirement is if you are required to have a Life Expectancy Set Aside due to credit or income limitations.
Question – I already have a reverse mortgage. Can I refinance it?
Answer – Yes, it is possible to refinance it. However, there are specific rules. You can’t just refinance it to change from a variable rate to a fixed rate OR to get a lower interest rate. There has to be a benefit. There are several rules which were outlined by industry watchdog NRMLA. Two of the main rules are that you have to receive 5 times more proceeds than the cost. Another main rule is that you can’t do a refinance until you’ve had the loan for at least one and a half years.
Question – My home is vested in a trust. Can I get a reverse mortgage and keep it vested in a trust?
Answer – Yes, you can get a reverse mortgage and have title held in a trust. Keep in mind, your lender and the title company will have to review and approve the trust. Generally, a revocable trust is OK. Irrevocable trusts may not be OK.
Question – What is the maximum loan amount available?
Answer – There are three items that determine how much you can get with an FHA reverse mortgage:
- The date of birth of the youngest borrower.
- The appraised value. Keep in mind the maximum appraised value considered is $679,650
- Lastly, something call the Expected Interest rate also dictates how much you get. The Expected Interest Rate is comprised of something called the 10 year LIBOR SWAP rate and a margin. The EIR component changes weekly. Hence, the amount you get can change weekly.
At present, the maximum loan amount for a 62 year old with a home valued at $679,650 or more is about $293,000. Remember, for now, this can change weekly (higher rates equals lower loan amounts and vice versa). The loan amount gets bigger for each year one ages all the way up to age 97. At age 97 the maximum loan amount is about $509,000.
Question – What if I owe more than the total maximum loan amounts mentioned above?
Answer – There are proprietary / jumbo reverse mortgages. The percentage of your total appraised value that investors will lend on is a little conservative, BUT they do eliminate the maximum appraised value figure of $679,650. The maximum total loan amount for the jumbo reverse loan is $4,000,000 for qualified homes and individuals.
Question – Can my home be vested or titled in the name of my company or LLC?
Answer – No, the title needs to be held in individuals names or in a trust.
Question – If I take out a reverse mortgage now, but decide not to live there in the future can I sell my home?
Answer – Yes, you can sell your home at any point after taking out a reverse mortgage. It works like a regular home loan. You’d sell your home, then the proceeds of the sale would first go towards paying off your loan balance. Then, you’d get the rest of the equity (minus any realtor fees of course).
A reverse mortgage can be a great way to supplement retirement for older homeowners. If there are any questions that were not answered, reach out to us.
Question – Are there any out of pocket expenses if I do a reverse mortgage?
Answer – There are two potential out of pocket expenses when you do a reverse mortgage.
First, FHA requires that you do reverse mortgage counseling before you can do a reverse mortgage. The counseling can either be Free, paid up front, or paid at closing via the loan proceeds. In cases where there is free counseling, it’s because the government provides grants that pay for the counseling.
Secondly, there is an appraisal involved if you get a reverse mortgage. The appraisal needs to be paid for up front prior to the appraisal getting done. This is the case because the appraiser gets paid regardless of whether you complete the reverse mortgage or not. Unlike the counseling fee, this fee gets paid by the borrower and there are no grants to pay for the appraisals. Hence, it’s up to the potential borrower.
A reverse mortgage can be a great way to supplement your income during retirement. For more information, please reach out to us and request your free info kit and thank you for visiting our reverse mortgage faq.