What is a Reverse Mortgage?A reverse mortgage is a unique, Federal Housing Administration (FHA)-insured loan that allows eligible homeowners age 62 years and older to convert a portion of their home’s equity into tax-free funds without having to make monthly mortgage payments.Reverse mortgage loans have helped homeowners to:• Supplement retirement income• Pay off an existing mortgage or other existing debt• Pay for medical care, prescription drugs and in-home care• Cover large or unexpected expenses• Make home improvements and repairs and much moreHow Does a Reverse Mortgage Work?A reverse mortgage is a loan for senior homeowners that uses the home’s equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. Any remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage.Eligibility For a Reverse MortgageTo be eligible for a HECM reverse mortgage, the Federal Housing Administration (FHA) requires that all homeowners be at least age 62. The home must be owned free and clear or all existing liens must be satisfied with proceeds from the reverse mortgage. If there is an existing mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at closing. Generally there are no credit score requirements for a reverse mortgage.Outliving the Reverse MortgageGenerally speaking, a reverse mortgage loan cannot be outlived and will not become due, as long as at least one homeowner lives in the home as their primary residence, continues to pay required property taxes and homeowners insurance and maintains the home in accordance with FHA requirements.Estate InheritanceIn the event of death or in the event that the home ceases to be the primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage loan or put the home up for sale. If the equity in the home is higher than the balance of the loan when the home is sold to repay the loan, the remaining equity belongs to the estate.If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA. No other assets are affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage.Loan LimitsThe amount that is available generally depends on four factors: age (older is better), current interest rate, appraised value of the home and government imposed lending limits. Use the calculator to estimate how much you could be eligible for.Distribution of Money From a Reverse MortgageThere are several ways to receive the proceeds from a reverse mortgage.•Lump sum – a lump sum of cash at closing.•Tenure – equal monthly payments as long as the homeowner lives in the home.•Term – equal monthly payments for a fixed number of years.•Line of Credit – draw any amount at any time until the line of credit is exhausted.•Any combination of those listed above•Begin here to calculating the proceeds you may be eligible to receive Difference Between a Reverse Mortgage and a Home Equity LoanGenerally a home equity loan, a second mortgage, or a home equity line of credit (HELOC) have strict requirements for income and creditworthiness. Also, with other traditional loans the homeowner must still make monthly payments to repay the loans. A reverse mortgage generally has no credit score requirements and instead of making monthly mortgage payments, the homeowner receives cash from the lender.With a reverse mortgage the amount that can be borrowed is determined by an FHA formula that considers age, the current interest rate, and the appraised value of the home. Typically, the more valuable the home, the higher the loan amount will be, subject to lending limits.To summarize the key differences, with traditional loans the homeowner is still required to make monthly payments, but with a reverse mortgage the loan is typically not due as long as the homeowner lives in the home as their primary residence and continues to meet all loan obligations. With a reverse mortgage no monthly mortgage payments are required, however the homeowner is still responsible for property taxes, insurance, and maintenance.Application ProcessThe application process for a reverse mortgage generally takes about 30-45 days from start to finish and has five major steps. However, the longest part of the reverse mortgage process is the decision-making process that leads up to the application.Homeowner(s) typically research reverse mortgages using resources such as this site for several months. Next they request information from a local reverse mortgage specialist. The homeowner may invest one to two months meeting with the specialist in person and reviewing the good faith estimate and other loan documents.Step 1. Initial ApplicationThe application legally authorizes the lender to begin the application process but the lender cannot incur any costs on your behalf until Step 2 (counseling) is completed. The application is not binding and can be canceled at any point during the process.Step 2. Reverse Mortgage CounselingEven if the application has been completed, the lender is not legally permitted to incur any costs on the applicant’s behalf (such as ordering the appraisal) until the applicant has submitted a signed HECM Counseling Certificate. This is proof that the applicant has completed the mandatory counseling session with a HUD-approved counseling agency.Step 3. AppraisalThe appraisal establishes the legal value of the applicant’s property. The reverse mortgage appraisal must be conducted by an independent HUD approved appraiser (not all appraisers have this approval) and it must follow specific HUD guidelines. This means that even if a homeowner already has an appraisal, it will most likely have to be re-appraised.Step 4. UnderwritingOur Underwriting department reviews all of the documentation and identifies conditions to be satisfied prior to closing related to any additional or missing items. Once the conditions have been completed, the final closing date can be set.Step 5. ClosingThe lender and the applicant set a closing date where a notary or attorney meets with the applicant to sign the final closing documents. Once the closing documents are signed, there is a three-day ”right of rescission” period. This means that even though the closing has taken place, the applicant can still cancel the loan with no penalty for three business days after the closing. The three-day “right of rescission” period does not apply to the HECM for Purchase Product.Following the right of rescission period, the title company will issue a check or wire the funds to the borrower’s account. If the applicant was using the reverse mortgage proceeds to pay off an existing mortgage, the title company will also send the mortgage payoff amount to the lender.
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Discover the path to a Reverse Mortgage
A reverse mortgage is a unique, Federal Housing Administration (FHA)-insured loan that allows eligible homeowners age 62 years and older to convert a portion of their home’s equity into tax-free funds without having to make monthly mortgage payments.Reverse mortgage loans have helped homeowners to:• Supplement retirement income•Pay off an existing mortgage or other existing debt•Pay for medical care, prescription drugs and in-home care•Cover large or unexpected expenses•Make home improvements and repairs•Stretch retirement savings