Misconceptions
1- I will have to sign over the title, and the bank/lender will own my house.
The homeowner never relinquishes the title to the home on any reverse mortgage products. The title remains in the homeowners’ name.
2- The bank/lender will take my house when I run out of reverse mortgage funds. I can be thrown out of my house.
The purpose of a reverse mortgage is to allow seniors to remain in their homes. The reverse mortgage is not due until the last surviving borrower permanently leaves the residence, regardless of the balance of reverse mortgage funds. The only exception is if the borrowers violate one of the terms of the loan (i.e., a home remains in disrepair; title is transferred to another name, failure to pay homeowners insurance or property taxes, etc.)
3- When the reverse mortgage comes due, the bank/lender will sell the house.
Repayment typically comes from the sale of the home, but it is up to the senior or the estate to sell the home. Once the home is sold, the borrower or estate pays the reverse mortgage balance and keeps any and all remaining funds.
4- I will owe more than the home is worth, passing on debt to my children.
Reverse mortgages are non-recourse loans, ensuring that debt cannot be passed to heirs. If the home is worth less than the loan balance, the borrower only repays the amount for which the home is currently valued.
5- I won’t qualify because of my credit or lack of income.
Income and credit scores are not deciding factors for reverse mortgages. However the lender will conduct a minimal credit check for identity verification purposes and to ensure government and investor guidelines are satisfied.
6- The home must be owned “free and clear”.
To qualify for a reverse mortgage, the home does not need to be owned “free and clear.” However, any existing mortgage debt will be paid off first with the reverse mortgage funds. The homeowner will receive the remaining funds, if any. Many people obtain a reverse mortgage for the purpose of getting rid of their monthly mortgage payments forever.
7- The lender will take part of my home’s future appreciation.
Prior to HUD’s involvement in the reverse mortgage industry in 1989, some reverse mortgages did have a “shared appreciation” clause. Currently we do not offer any reverse mortgages with these types of clauses.
8- I am not poor; I don’t need a reverse mortgage.
Many still believe that reverse mortgages are only for those with financial needs. However, times have changed. Seniors are now using their funds for many purposes, including estate planning or simply to improve their standard of living.
9- My Social Security, Medicare/Medicaid benefits will be effected.
Not true Reverse mortgage proceeds are not viewed as income and a reverse mortgage line of credit is not viewed as an asset. Therefore, a reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicare or receive Supplemental Security Income (SSI) any reverse mortgage funds that you receive must be managed carefully. Please consult with an advisor or your local
Frequently Asked Questions About Reverse Mortgages*
For many borrowers it helps to know the right questions to ask when you are deciding on a loan product. For a reverse mortgage, it is critical to know the answers to these questions before you begin your research.
1. What is a reverse mortgage? Simply, a reverse mortgage is a loan program that allows senior homeowner’s to convert their equity into cash. The loan payments are in reverse as the lender makes payments to you, the homeowner. The mortgage balance will grow over time.
2. Are there any special requirements to get a reverse mortgage? As long as you own your home, are at least 62 years of age (and anyone else on title) and have enough equity in your home you can apply for a reverse mortgage. There is no special income, credit, or medical requirements. You may be eligible for a reverse mortgage even if you have an existing mortgage. In fact, many people get a reverse mortgage just to pay off a mortgage or line of credit.
3. How much money can I get with a reverse mortgage? The amount of funds you are eligible to receive depends on your age (or the age of the youngest spouse in the case of couples), the appraised property value, current interest rates and in the case of the government program (HECM), the lending limits. In general, the older you are and the more valuable your home (and the less you owe on your home) - the more money you can borrow with a reverse mortgage.
4. How can I use the proceeds from a reverse mortgage? The proceeds from a reverse mortgage can be used for anything, whether it is to supplement retirement income, to cover daily living expenses, repair or modify your home, pay for health care, pay off existing debts or cover property taxes.
5. What if I have an existing mortgage? You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. The reverse mortgage funds will be used to pay off any existing lien or debt on your home. If the amount of your existing mortgage is too large to pay off using the reverse mortgage proceeds, you may be required to bring in additional funds to close the reverse mortgage or you may not be able to take advantage of a reverse mortgage.
6. What amount can be borrowed and what are the disbursement options? The loan limit is based upon the age of the youngest borrower, the expected interest rate, the value of the home and the amount owed on the home. Reverse mortgage amounts 30%-80% of the home’s value, depending on the age of the borrower. There are several payment options available on a reverse mortgage such as: Equal monthly loan advances to the borrower for an unlimited time, as long as the borrower is in the home. This is known as“tenure” option. Monthly loan advances can also be received for a fixed period of time by the borrower. This option is known as a “term” option. A line-of-credit option, allowing the borrower to draw cash when needed and in amounts chosen by the borrower. A lump sum payment which the borrower receives at closing. A combination of any or all of these three options. All of these options and the freedom to switch from one to the other are available from the federally insured Home Equity Conversion Mortgage (HECM) which is the most common reverse mortgage. When proprietary reverse mortgage products are chosen some of the options included above may not be available.
7. How will a reverse mortgage affect my Social Security, Medicare or pension benefits? Reverse mortgage proceeds are not viewed as income and a reverse mortgage line-of-credit is not viewed as an asset. Therefore, generally a reverse mortgage does not affect regular Social Security and Medicare benefits. However, if you are on Medicaid or receive Supplemental Security Income (SSI), any reverse mortgage proceeds that you obtain must be handled carefully. These programs vary from state to state so to be safe you should contact a financial advisor, Medicaid expert or the local Area Office on Aging.
8. What are the benefits of a reverse mortgage? One main benefit is that you will be able to stay in your home without any monthly mortgage payments. Plus, unlike a home equity line or a refinanced mortgage, there are no income or credit qualifications and the loan is not due and payable until you leave your property permanently.
9. How does the interest work on a reverse mortgage? With a reverse mortgage you are charged interest only on the proceeds that you receive. Currently, there are several fixed rate reverse mortgage products available, however, most reverse mortgages charge a variable interest rate that is tied to an index, such as the 1-year Treasury Bill or the London Interbank Offered Rate (LIBOR) plus a margin that is added to the rate you are charged. Interest is not paid out of your available loan proceeds, but instead compounds over the life of the loan and is not paid until repayment of the loan occurs.
10. What is the Service Fee Set- Aside? Under the FHA Home Equity Conversion Mortgage (HECM) program, you are charged a monthly servicing fee that ranges from $30-$35 to manage your account once the loan closes. The Service Set-Aside is part of your loan funds reserved to cover future service fees.
11. When do I pay back my reverse mortgage? No monthly payments are due on a reverse mortgage while it is outstanding. The loan is repaid when you cease to occupy your home as a primary residence, whether you (the last remaining spouse, in cases of couples) pass away, sell the home or permanently move out. The amount owed can never exceed the value of your home. When you sell your home and the sales proceeds exceed the amount owed on a reverse mortgage, the remaining equity still belongs to you or your estate. A borrower may also pay off a reverse mortgage loan at any time without a prepayment penalty.
12. What if my loan balance exceeds the value of my home? neither you nor your estate will ever be required to pay back more than your home’s value.
*This information was taken from the Area Office on Aging website, the AOA for your specific situation.
