FHA Reverse Mortgages For Seniors

Reviewed: August 20, 2014
By FinanceWeb

This federal program helps homeowners age 62 or older to become more financially secure by using the equity in their home as a source of funds. A reverse mortgage is a loan, and homeowners can use the money as they wish. Many people use money as income to make life easier by adding to Social Security or a retirement income; other borrowers might use loan proceeds for healthcare or medical bills. The big advantage of a reverse mortgage is that it does not require monthly payback.

Reverse Mortgage Is Not An Equity Loan

The reverse mortgage is not like a home equity loan. The borrowers do not pay back the money while living in the primary residence; the loan repayment comes after they no longer need the home as a residence. One must repay home equity loans on a monthly basis. Home equity borrowers get a loan but also a monthly bill they must pay. Reverse mortgage can relieve financial stress and improve financial security. It adds income but does not add an additional bill to pay. The purpose of the program is to improve finances for older homeowners and help them keep their homes. At the end of the loan period, the loan must be repaid. The loan must be repaid when the last remaining borrower sells the home, no longer uses it as a residence, or dies. Funds in excess of the loan amount go to the borrowers or their estates. It is important to note that the program does not pass any excess debt back to the borrowers or borrowers’ estates, and the heirs will not have to repay the loan.

Borrow and Stay In Your Home

The reverse mortgage provides money for the homeowner. If a fixed rate mortgage then funds can be one large payment at the closing, called a lump sum payment. If an adjustable rate mortgage, the lender can pay funds monthly or in a line of credit. If paid monthly, homeowners can choose a tenure payment in which the lender pays a regular amount for every month they stay in the home, or an agreed amount for a certain number of months. Another way to get the funds is to have a line of credit, which homeowners can use when they wish. It is also possible to have part of the funds in a line of credit and the rest in monthly payments.

Who Is Eligible?

Homeowners age 62 or older who have paid all or most of the mortgage on their homes. At the time of approval, they must not have any delinquent federal debts. They must verify income and that they are current on obligations connected to the home such as utilities and insurance. The key is that borrowers must occupy the home as their primary residence, and the property must remain as the primary residence for the duration of the loan.

What Property Is Eligible?

Eligible structures include a single-family residence, a two to four unit residence if the borrower occupies at least one unit, and a HUD approved condominium. A pre-made home is eligible if it meets HUD regulations. An approved lender will help with the loan and the borrowers can finance the closing costs, origination fees, and other allowed costs as part of the loan.

How Does It Work?

The law requires counseling so that each homeowner can understand the risks and advantages of borrowing on the value of their home. The first step is to meet with a reverse mortgage counselor and learn about the program. It is important that each borrower understand the risks, if the homeowners do not meet the conditions, the contract requires repayment of the loan. Borrowers must keep the conditions of the loan or else it will become due and payable. The loan requires that the borrowers use the home as their primary residence, pay property taxes and all utilities, and keep insurance coverage on the property, including flood insurance. Once borrowers decide to go ahead, the process requires an appraisal to determine the value of the loan. Once ready, the lender will arrange a closing to sign all documents and arrange payment of funds.

Limits And Cancellation

Federal rules provide the maximum amount of the loan value of a residence at $625,000. Other factors that limit loan value are the interest rates, and the age of the younger borrower. If, at the last minute, the borrowers decide not to go ahead, they can change their minds. Borrowers can cancel at any time before closing; they have a right of rescission, or cancellation, up to three-days after the closing.

A Great Way To Use Home Equity

A FHA reverse mortgage is a great way for some homeowners to increase income and have more financial security. The program helps homeowners stay in a familiar place and enjoy the benefits of the many years of building equity. They can have extra monthly income, a credit line, or a large single amount. For some it is also a way to buy a new home, as homeowners can use a reverse mortgage loan to purchase a new home if they can pay any difference between the loan and the new home costs from cash on hand.