There are a few different types of reverse mortgages, but the most common one is FHA’s Home Equity Conversion Mortgage (HECM). It is called a reverse mortgage because the loan balance increases over time instead of decreasing. A HECM loan converts some of the equity you have in your home into cash. These cash payments can be distributed as a lump sum, monthly, or a credit line to be used on an as-needed basis. The various types can be combined. The beauty of the monthly payout is that the borrower can continue to receive payments for as long as they live in the home. If they die while still receiving payments, the money doesn’t have to be fully paid back (with a few exceptions to be discussed later).
The property must be a primary residence, 2-4 units, in good condition. If it is a condominium, it must be FHA-approved (which currently would eliminate most of South Florida). Borrowers must be 62 or older, and any existing mortgage lien must be paid off at closing. A credit report doesn’t matter unless the borrower has a history of defaults on a government loan. The borrower must have sufficient resources to continue to maintain the property and pay property taxes and insurance.
In addition to interest rates, the amount of available money depends on a few other things. The life expectancy of the borrower is a determining factor; the older the borrower, the more money they may receive. The value of the home is also important; the lender will use either the appraisal value or the FHA mortgage limit ($970,800 in 2022), whichever is lower. The type of distribution also affects the total amount. A credit limit can’t be exceeded, and a lump sum won’t be renewed. A monthly payment, however, can continue until death or relocation.
FHA loans are costly. In addition to paying an up-front mortgage insurance premium at closing, the borrower accrues a monthly mortgage insurance fee.
A reverse mortgage has some of the same conditions as a purchase loan. The borrower must keep the home in good repair, pay property taxes, and maintain homeowner’s hazard insurance. The last of these may be one of the more common reasons for foreclosing. When the homeowners previously paid off their mortgage, they might have chosen not to continue the hazard insurance. Policies can be costly, and the borrowers might be tempted to stop making the payments when they have a reverse mortgage.
Loan Pay Off
When a borrower decides to sell a home with a reverse mortgage, the proceeds of the sale will pay off the loan balance. If market value is less than the balance, the borrowers may be able to negotiate a short sale.
When the last borrower dies, the heirs have a few choices. They can sell the house, and the proceeds will pay off the loan. If the proceeds are insufficient, they will never be required to pay more than what is gained from an arms-length sale. They can sign the deed over to the lender and walk away, or they can allow the lender to foreclose without a deed-in-lieu. Reverse mortgages are non-recourse loans; the heirs or borrowers are not responsible for paying the difference between the loan balance and a lender’s sale proceeds. The FHA reimburses lenders for any losses they incur on FHA loans. If the heirs want to live in the home, they can purchase the property at the amount of the loan balance or 95% of the appraisal value, whichever is lower.
If the borrower is absent from the home for mental or health reasons for more than a year, the lender can call the loan due.
A reverse mortgage can be a gift for some senior citizens, but interested parties should read all they can about it before listening to a lender’s sales pitch.