Reverse Mortgage Counseling Frequently Asked Questions
Reverse mortgage counseling provides important considerations for seniors.
1. What is a reverse mortgage?
A reverse mortgage is a loan that lets a homeowner convert the home’s equity into cash. The equity built over years of payments can be made to the homeowner in a lump sum, as periodic payments, or as a supplement to Social Security or retirement funds. It is different from a home equity loan or second mortgage, as repayment is not required until the borrower no longer uses the home as the principal residence.
2. What is reverse mortgage counseling?
Reverse mortgage counseling is an educational session to help seniors be knowledgeable about their options. It helps them be able to make the best decision concerning their situation. The session is not meant to make a recommendation; in fact, this is prohibited. The trained reverse mortgage counselor is independently certified in the many aspects concerning senior finances and the possible options. The session can be done over the telephone, with an online presentation, and in-person. Some states, including North Carolina and Massachusetts require in-person counseling.
3. What is a reverse mortgage counseling certificate?
Once you have successfully completed a reverse mortgage counseling session, the reverse mortgage counselor will provide a certificate of counseling. That certificate must be presented to the loan originator at the loan closing.
4. What if we have a condominium, not a single-family home?
Yes, you can still qualify for a reverse mortgage program. The property must be your principal residence, but it can be a single-family home; a one to four-unit dwelling with one unit occupied by the homeowner; a manufactured (mobile) home; or a FHA-approved condominium. The property must meet FHA property standards, but repairs can funded from the loan.
5. What are the differences of a reverse mortgage and a home equity loan?
This is explained in detail in your reverse mortgage counseling session. With a second mortgage, or a home equity line of credit (HELOC), there must be adequate income to qualify for the loan, and make monthly payments. A reverse mortgage is different, because it makes payment to you, and it is available regardless of income. No payments are made, because the loan isn’t due until change or leave residence. You are required to pay real estate taxes, utilities, and insurance, but with a HUD reverse mortgage, neither you nor your spouse can be forced to vacate your house because of a missed mortgage payment.
6. Can the lender take away our home if my spouse outlives the loan?
No. Your spouse cannot outlive the loan agreement, and no debt from a reverse mortgage loan is passed along to the estate or heirs. Your spouse cannot be forced to sell the residence to pay off the mortgage, even if the balance exceeds the value of the property.
7. Will we have an estate that we can leave to heirs?
When the home is sold or no longer used as a primary residence, the cash, interest and other finance charges must be repaid. All proceeds beyond that owed belongs to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.
8. How much money can we get from our home?
In the reverse mortgage counseling session, you will find out how much is likely to be available to you. A borrower who uses a reverse mortgage will receive an amount calculated with a formula that includes a Maximum Claim Amount. This means the maximum you can receive is determined with factors including age and the appraised value of the property (or the maximum FHA amount). You and your spouse should discuss the factors and the formula with the lender and your reverse mortgage counselor.
9. What if we want more than the FHA-insured mortgage limits?
Like FHA’s regular mortgage programs, the reverse mortgage programs are primarily for low- and moderate-income families. An owner with a property worth well beyond the FHA limits, and a large amount of equity, will not receive as much cash from a HUD HECM as they might from another type of HECM loan. However, everyone interested in a reverse mortgage is encouraged to speak with a reverse mortgage counselor.
10. Should we use an estate planning service to find our HUD reverse mortgage?
There really is no reason to use such a service. This information is provided without cost, and HUD-approved agencies are available at minimal cost, and in some cases, for free, to provide reverse mortgage counseling.
11. How do we qualify for a Reverse Mortgage Loan?
A reverse mortgage is easier to obtain than a regular mortgage, provided that:
- You are at least 62 years of age or older.
- Your home is or will be your primary residence.
- You have substantial equity in your home.
12. How Do we Benefit from a Reverse Mortgage Program?
You can use the money you receive from your reverse mortgage in any way you choose:
- Supplement your income
- Home improvements
- Pay off a current mortgage
- Medical expenses
- Pay off debt
- Buy a new car
- College tuition or gifts to family
13. How much money can we receive?
The amount you can receive from a reverse mortgage is determined by your home’s current value, the age of the youngest borrower, and the current interest rate. A counselor will assist you in evaluating your options and calculate the amount of money available.
14. How do we receive the money?
With a HUD reverse mortgage, you usually have these payment options to choose from:
- Tenure: Equal monthly payments for as long as you occupy your home as your principal residence.
- Line of Credit: Get cash at any time up to the available limit. Interest is charged when credit is accessed.
- Lump Sum Advance: Receive all or part of the money in a lump sum at the closing of the reverse mortgage.
- Modified Tenure: A portion of the loan is set up as a line of credit, in addition to monthly payments.
- Term: Receive equal monthly payments for a fixed period of time of your choosing, such as 5 or 10 years.
The payment plan can be changed for a small fee.
15. How is interest charged on a Reverse Mortgage Loan?
The interest rate options on a reverse mortgage are adjustable and fixed. The adjustable rates are tied to an index, such as the LIBOR index, plus a margin. Interest is charged on the balance, consisting of the cash received, the initial closing costs, mortgage insurance & servicing fees. With a line of credit, interest charges begin when the money is drawn from the account.
There are adjustable rates, and caps on the amount of increase. Monthly adjusting rate limits are capped at 10 points above the starting rate. There are annual adjusting rate caps of 5 points above the starting rate, and the rate cannot increase more than 2 points at each annual adjustment.
16. What costs are involved with a Reverse Mortgage?
A reverse mortgage counseling session will cover this in detail. HUD charges a Mortgage Insurance Premium of 2% of the maximum claim amount; also there is mortgage insurance equity to 1.25% of the balance. The closing costs and origination fees depend on the program selected. Closing costs include appraisal, title insurance, escrow, recording fees and possibly others. Many reverse mortgages have monthly servicing fees from $25 to $35 per month, which is added to the balance. A good faith estimate is provided for detailed costs.
17. When does the Reverse Mortgage need to be repaid?
The reverse mortgage becomes due when you leave the home – when you move, sell or pass away. Reverse mortgages are normally repaid from the sale of the home, with any remaining equity paid to the homeowner or heirs. If your spouse passes away, you continue to receive the benefits of the reverse mortgage, and no repayment is due until you permanently leave the home.
18. Do we still own our home?
Yes, you keep full ownership of your home. Like all mortgages, the lender has a lien against the property. Since you are not making monthly payments, the balance increases over time. The loan balance consists of the financed closing costs, the cash proceeds from the reverse mortgage and the accrued interest. Any remaining equity can be paid to you or your heirs.