Perhaps no loan product has been the subject of so much confusion or fear as the “reverse” mortgage. And much of it was well-earned. Many of the products offered in the past few decades were expensive, complex, and misapplied. Some even effectively robbed people of ownership of their homes. Most of the major banks exited the reverse mortgage business years ago
But it’s a new day, and reverse mortgages are making a comeback. But now, most are regulated and administered by the Federal Housing Authority (FHA), with built-in safeguards to protect seniors.
What is a “reverse mortgage” (also known as a Home Equity Conversion Mortgage, or “HECM”)? It’s a special type of mortgage that allows homeowners age 62 or older to use the equity in their homes without ever needing to make a mortgage payment. It’s not repaid until the borrower dies or no longer occupies the home as a primary residence.
The best candidates for HECMs are seniors with small mortgage balances, good equity, and not enough social security income to live comfortably. The loan is effectively a line of credit which allows the homeowner to eliminate their mortgage payment and to get money for living expenses. Funds can be taken either as a lump sum up-front, a regular monthly draw, as needed, or a combination of all three.
It’s not the best option for everyone, but for those who don’t qualify for traditional mortgages or home equity lines of credit (HELOCS), or for those that simply don’t want the burden of making a payment, it could be an ideal solution.
Here are answers to some of the questions people ask about HECMs:
Q: Do I lose title to my home?
A: No. You keep title until the house is sold. Q: What happens if I die?
A: The mortgage is due and payable. The lender is owed the loan balance, but remaining equity belongs to your estate.Q: What happens if I have to go into a nursing facility?
A: The loan is due and payable if you fail to occupy for 12 consecutive months. So, short-term stays in nursing facilities are not a problem.Q: How much can I borrow?
A: It depends on your age and the amount of available equity in your home, with a maximum of $625,500.
Q: What if my spouse is under 62 when we take out the HECM?
A: A spouse under 62 cannot be a borrower on the loan, but is NOT forced out in the event of your death as long as he/she retains the home as a primary residence.
Q: Can I qualify for a HECM even if I have NO income?
A: You must have AT LEAST enough income to cover your property taxes and homeowners insurance.
Q: If my home appreciates during the term of the HECM, do I need to share that with the lender?
A: No. All appreciation belongs to you.
Q: What if, at the time of my death, the house is worth less than the balance of the mortgage?
A: This is a NON-RECOURSE loan. The lender cannot go after your estate for the difference.
Q: I’ve had some credit problems. Will that make me ineligible?
A: Probably not. There is no credit-score criteria for a HECM.
Q: Do I pay income taxes on the money I draw?
A: No. The funds are borrowed, hence not taxable.
Q: Can I get a HECM on my condo?
A: Yes, but the condo project must already be FHA-approved.
Q: Are there any other property restrictions?
A: No mobile homes, manufactured homes, log cabins, dome homes, co-ops, or any property that produces income, like a farm or ranch.
Q: Do I need to attend a training seminar?
A: Yes, typically about an hour, at a cost of about $150.
Q: How do I learn more?
A: Call one of the mortgage professionals at FINET Mortgage for a no-obligation assessment at (408)872-8100.