What is a Reverse Mortgage and Do You Qualify?
There they are — the stars of TV and film touting reverse mortgages for Seniors. Sounds great! Get money for your home instead of paying the bank. What an easy decision!
Whoa, Nelly! First, you must qualify.
Reverse Mortgages or HECM (Home Equity Conversion Mortgages) obtain cash flow either in lump sums or monthly payments to provide Seniors with financial assistance or to be used as a line of credit, pulled out as needed — you can pay off your existing mortgage and have money for your needs.
To qualify you must:
- Be 62 years or older.
- Use the home as your principle residence. You must live in the home for at least 6 months a year — this cannot be a vacation home.
- Own the home outright, or if there is a mortgage, have significant equity in the home.
- Pass a financial assessment. This is basically a money management evaluation to assure you can keep current with property taxes, insurance, and maintenance so the home does not lose value due to neglect.
- Meet HUD minimum standards. Condos and mobile homes manufactured after 6/15/1976 and meet FHA standards qualify.
- If there is a second mortgage (Home Equity Loan HELCO) or any federal debit (unpaid back taxes, defaulted student loans) you are ineligible.
How to apply:
- Fill out an application with an institution that provides HEMC.
- Undergo the financial and credit assessment.
- Meet and have a pre-loan independent FHA Reverse Mortgage Counselor.
This ensures that you (and your spouse) understand all the benefits and risks associated with obtaining the HECM and whether this product is for you.
How can you receive the funds, and what can be done with them?
You have options for obtaining the HEMC, whether it be in a lump sum to help pay off your current mortgage, a monthly amount to add to your income tax-free, or just having it available as a line of credit. The requirements are that you remain current on all property taxes and insurance, and keep the property in good condition.
The loan must first be paid off by a surviving spouse (if married). Otherwise, it will pass to the heirs from the proceeds of the sale of the home, or other funds. If the home is being sold to pay off the HEMC, then any balance after the loan is repaid remains with your heirs.
Perhaps you wish to take advantage of the new laws regarding the Required Minimum Distribution on your IRAs; having a HEMC can assist with cash flow so that your retirement funds can be paid to your heirs.
There is always a downside.
- The loan increases over time as the interest is accumulating before payoff.
- The fees for establishing the HEMC may be higher than a traditional mortgage.
- Your ability to receive need-based Government benefits may be impacted; a Benefits Specialist would have to be consulted to find out the details.
- The loan can be “called” and payment, like any mortgage or conventional loan, must be paid or foreclosure becomes a possibility.
- Private Mortgage Insurance is required.
So, if the reverse mortgage may be something you wish to consider, explore all the details before committing to this income stream.