Whether it’s unexpected life events, a deficiency in retirement planning or the desire to hang onto profitable assets, some older homeowners will take advantage of a reverse mortgage loan to ease their cash flow needs.
What is a reverse mortgage loan?
A reverse mortgage is a kind of home equity loan designed for homeowners aged 62 and older. The reverse mortgage process is fairly straightforward and can be a useful financial tool for seniors.
The amount of money available is based on several factors.:
- the age of the borrower
- the value of the home
- the amount of existing liens
Money can be received in several ways:
- a monthly sum
- one lump sum
- as a line of credit
- as a combination of any of the above
Unlike traditional home equity loans, the borrower doesn’t make any payments for their mortgage as long as they stay in the home.
As part of the reverse mortgage process, once the home is sold, the proceeds of the sale goes to the lender to pay off the loan. If it sold for less than what was owed, all of the money from the sale goes to the lender and the homeowner or estate owes nothing…it’s considered paid.
Note: Non borrowing spouses can stay in the home after the death of their loved ones.
How long does it take to get a reverse mortgage?
The lender you use and the time it takes to obtain all necessary documentation will determine how long the process takes.
Most reverse mortgages, however, can typically be processed within 30 to 60 days, sometimes less.
Step by step reverse mortgage process
The reverse mortgage underwriting process requires no more time than traditional home equity loans.
If you’re considering a reverse mortgage, the following step by step reverse mortgage process is similar throughout the industry.
Do your research
Contact several lenders to find out more about your options. Involve a trusted adviser, friend or family member to help you if needed.
Before you can obtain a reverse mortgage, HUD requires that all borrowers obtain third party counseling from one of their approved agencies. The counselor’s job is to make sure you understand all facets of the loan you’re obtaining.
Submit your application
As part of your application process you’ll decide how you wish to receive payment. As noted above, you can obtain your funds in any combination of the following payment methods.:
- as a monthly payment
- as a line of credit
- as a lump sum amount
Your lender will do the following before sending your application off to their underwriting department.:
- Obtain a payoff amount from your existing lender. Your loan will be paid off before you’re able to receive any funds from the refinance.
- Order an appraisal of the home from an approved HUD/FHA appraiser. The amount you’re able to borrow depends on the value of your home.
Note: Sometimes repairs need to be made before funding can be obtained. The repairs must also be approved by HUD/FHA.
- Order a home inspection to make sure that it’s structurally sound. The inspector will look for any sign of termite or dry rot damages to your home.
- Order insurance (if it’s not currently insured). If your home isn’t insured the lender will require that you obtain it. If you are already insured, you won’t be required to purchase a new policy.
Application is sent to underwriting
After your lender receives the appraisal and the inspection they forward the information to their underwriting department which will process it according to HUD/FHA guidelines for reverse mortgages.
Underwriting has finished their job and sent it to the closer who will ensure that all necessary documentation is in order. Once you’ve signed the loan documents you have 3 business days in which you can cancel the loan.
After the 3-day “rescission period” is finished you’ll receive your funds and your copies of the closing documents.
Note: Your lender won’t be paying your property taxes or homeowners insurance…that will be your responsibility.
What you need to know about repayment
You are not required to make any monthly payments for the length of the loan. The loan is due and payable in full when the following happens.:
- the home is no longer the primary residence of the borrower
- the home is sold
- the borrower dies
The deceased borrower’s estate can either refinance or sell the home to pay off the reverse mortgage. Any equity that remains belongs to the heirs/estate.
Consider interest and fees
The interest on traditional mortgages is paid with each monthly payment. Reverse mortgages, however, are different in that interest builds up during the life of the loan.
This means that over time, equity in the home is swallowed up slowly over the life of the loan.
And don’t forget, even though you’re not paying a monthly mortgage, you’re still responsible for taxes and insurance on your home.
If you fail to pay these expenses, it could put you into default and the reverse mortgage would be called due immediately.
Will I still own my home?
Despite common misconceptions, ownership of your home when you take out a reverse mortgage remains with you.
A reverse mortgage simply puts a lien on your property, just as any mortgage, however unlike other mortgages you’re limited in what you can do with the property in that you must maintain residence in the home.
Is a reverse mortgage right for me?
While a reverse mortgage may be exactly what you need, you should explore all other options first.
- does it make sense to refinance your current loan to a lower rate
- if you’re having problems making your mortgage payments, check into government programs in your area that could help by reducing your loan balance, making it easier for you to stay in your home
- can family members provide their own type of reverse mortgage to help you stay in your home
- if you need immediate cash and can afford the additional payment, a regular home equity loan could meet your needs
Bottom line, a reverse mortgage can play a part in your financial plans, but it’s important to look at four things when considering a reverse mortgage:
- your financial strategy
- your health requirements
- your financial security through retirement
- what you want your estate to look like
If you look at the consequences of the reverse mortgage on these four factors and determine that the results are acceptable, then a reverse mortgage might be right for you.