Updated January 2017
Are you interested in learning more about the FHA reverse mortgage program? You are not alone. Many seniors are exploring their options and wondering about the reverse mortgage program they keep hearing about or seeing information for on television.
Eligibility Requirements for FHA Reverse Mortgages
Reverse mortgage loans are a popular option for senior citizens to tap the home equity equity in their homes. While there are a number of mortgage lender offering various reverse mortgage programs with different eligibility and qualification guidelines, the Home Equity Conversion Mortgage (HECM) is the only one insured by the U.S. Federal Government. Any approved FHA lender has the ability to originate a HECM loan to help the seniors secure the financing they need.
To be eligible for a FHA HECM, the homeowner must be at least 62 years old with a significant amount of equity in their primary residence. The approval of a reverse mortgage insured by FHA depends on the satisfaction of a number of conditions. Upon a successful completion of the loan approval process, a senior homeowner will be able to withdraw the home equity in their home. The loan will also provide flexibility regarding how and when the payments are made. It’s possible to choose a fixed payment or a line of credit or any other combination of them.
A new primary residence may also be purchased with the proceeds from a FHA reverse loan as long as the borrower has sufficient cash to cover the difference between the sales price plus closing costs and the HECM proceeds.
Reverse Mortgage Borrower Eligibility Requirements
In order to qualify for a reverse mortgage, the borrower must:
- Be at least 62 years of age or older
- Either own the property outright or have substantial home equity
- Be currently living in the property
- Not have any delinquent federal debt
- Have attended a counseling session with a HUD-approved HECM loan counselor
Reverse Mortgage Property Requirements
In addition to above borrower requirements, the property to be used as collateral for a reverse mortgage must meet the following HECM property guidelines:
- Only residential properties with no more than four units, with at least one unit occupied by the borrower
- If the property is a condo unit, it should be located in a HUD-approved condo project
- If it’s a manufactured home, it should meet all FHA requirements
Reverse Mortgage Financial Requirements
The FHA lender may choose to do a thorough verification regarding your income sources, assets, current debt obligations, payments and credit history. It’s also necessary that you are current on your payments related to property taxes. An active property insurance policy that covers any hazards is also required.
How does a Reverse Mortgage Work?
A reverse mortgage is not some kind of exotic contraption that makes one have to turn around and back up to secure a loan. At the end of the day a reverse mortgage is a . . . mortgage.
Like a “regular” mortgage, money changes hands between a lender and a borrower, a lien is placed on the collateral (the home) and the loan earns interest over time. The BIG differences are that you get money rather than pay money and you never have to repay the loan for as long as you live in the home.
A reverse mortgage allows one to access the equity in their home. In doing so, they may convert that equity into cash. So, how does a reverse mortgage work? It works just like a regular mortgage except you get money instead of having to pay money against the loan. The loan is made using your home as collateral.
The Loan Amount
The lender takes into consideration the age of the borrower, the borrower’s expected life span, the value of the home, the expected appreciation rate of the home, and the expected interest rate on the mortgage for the life of the loan.
All of those factors are tossed into a blender and the amount that may be borrowed is determined. The loan amount allows for enough remaining equity to cover the expected interest and closing cost over the forecasted life of the loan. That amount is some fraction of the total home value, again determined by all of the factors listed above. It may be tendered in a lump sum distribution, a monthly payment for the rest of the lives of the borrowers, a monthly payment for a specific term, or a line of credit to be drawn against as needed over time.
To Qualify For a Reverse Mortgage
To qualify the youngest borrow must be at least 62 years old and have significant equity in their home. There are no credit qualifications; no income qualifications and no employment qualifications. The borrower has to agree to maintain the property taxes current on the home and to keep the home insured. It also must be maintained to minimum FHA standards, which is something most people would do anyway. That’s it.
The thing that many people find difficult to grasp is the bank (lender) does not own the home. Title to the home stays vested in the name of the owner. The next concept hard to grasp is that no payment has to be made on the loan . . . ever. And, this is the biggest mind bender of all, the loan never has to be paid off (paid back) for as long as the borrowers live in the home. It is perfect for retired people and for those that do not want to touch their nest egg; and, for those that wish to age in place in their own home.
I’ve been told, but I have not been able to confirm, that the loan does come due and payable on the 50th anniversary of the borrower’s 100th birthday. I would like to be around to collect.
And, that is how a reverse mortgage works.
At the beginning of the year, the Department of Housing and Urban Development released the final changes made to the existing program. These are to take effect in September 2017.
Some highlights include:
- Mortgagees are required to inform potential borrowers all of the HECM products, features and options that FHA insures, “in a manner acceptable to the [FHA] Commissioner, irrespective of the particular HECM products offered by the mortgagee.”
- The FHA Commissioner can lower the amount the requirement that the property be sold for at least 95% of the appraised value as necessary to adapt to market conditions and other factors.
FHA Reverse Mortgage FAQs
Are reverse mortgages a popular option among seniors?
Reverse mortgage is a unique type of loan in the residential lending world. Unlike other conventional residential mortgage loans, requirements related to age of the borrower and the borrower’s equity position in the property play a major role in loan approval. In order to be eligible for a reverse mortgage, the age of the borrower must at least be of 62 years old.
During 2012, more than 78,000 reverse mortgages were originated by FHA lenders. These reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs), are insured by the U.S. Department of Housing and Urban Development (HUD). Between 1990 and 2010, approximately 700,000 loans were issued by lenders to seniors.
The loan proceeds from a reverse mortgage can be used for anything without any restrictions. With a reverse mortgage, a borrower is not required to make repayments on the borrowed amount. This feature makes it an excellent choice for seniors who just want to take advantage of the equity they accumulated over the years without having to pay back at monthly intervals.
Is the Reverse Mortgage Right for Me?
Unlike traditional mortgage loans, HECM loans are different in many ways. It’s important to consider all aspects before initiating the loan approval process. A qualified HECM counselor will be able to assist you in understanding the eligibility requirements, program guidelines, the impact of taking a reverse mortgage on your financial situation, and other available financing options. The completion of the HECM counseling should allow you to make an informed decision regarding the suitability of a reverse mortgage for tapping into your home equity. The HUD website contains the complete list of eligible HECM counselors that you can contact locally to make an informed decision about reverse mortgage loans.
To successfully complete a reverse mortgage application process, a number of property and borrower eligibility requirements must be satisfied. If you find it difficult to sift through the various eligibility requirements, the better option would be to use the reverse mortgage calculator found on the FHA site. If you can feel certain about your qualification, contact a FHA-approved reverse mortgage lender to complete the loan application and begin the loan process. The entire list of FHA lenders that can handle a HECM loan in your locality can be found using the FHA lender search page. You may also ask your counselor for a referral to a reputed lender in your area.
Who can qualify for a HECM reverse mortgage?
Not everyone can apply for a FHA-insured HECM mortgage. To apply for a reverse mortgage loan with an FHA approved lender, the borrower must be at least 62 years old. Additionally, the property to be financed under HECM guidelines must be occupied as a primary residence. Only single family homes, 2-4 unit residential properties, manufactured homes and HUD approved condos satisfy the FHA property requirements.
The amount of existing home equity also plays an important role in getting a HECM approval. A homeowner who owns their current residence outright or has a substantial equity are ideally suited for a reverse mortgage.
How to begin the reverse mortgage application process?
FHA-approved lenders can handle HECM home loan applications from eligible seniors. Prior to completing a loan application with a lender, a potential homeowner is required to meet with a reverse mortgage counselor to understand all aspects of the loan program. The fee (about $125) can be added to the closing costs and paid through the loan proceeds from closing.
A homeowner who meets the eligibility guidelines and property requirements can get their loan approved in a few weeks. The interest rate on a reverse mortgage can be either fixed-rate or adjustable. Seniors opting for a fixed rate loan are required to take out all their loan proceeds in one big lump sum. A number of other options related to loan amount withdrawals are allowed for HECM loans that carry adjustable interest rates.
Who owns the title to the residential property after a HECM closing?
The title to the property remains with the borrower even after a loan closing. If you decide to sell the property at a later date, you or your estate needs to pay back the reverse mortgage loan amount, accumulated interest and any other fees. If there is still any equity left over, it belongs to you or your legal heirs.
When am I required to payback a reverse mortgage loan?
An FHA-insured loan is due for payment if:
- You die,
- You permanently relocate, OR
- You sell
Except in the above mentioned situations, a homeowner is not obligated to repay their reverse mortgage. However, if you default on your property taxes, home insurance premiums, or fail to make the necessary repairs to maintain the property in a habitable condition, the lender may choose to recall your loan.
Do reverse mortgages involve high closing costs?
As with any other FHA-insured residential mortgages, a borrower is required to pay upfront mortgage insurance premium. For a standard HECM loan, a 2% insurance premium based on the home value is applied. This fee is charged irrespective of the loan amount.
For example: If your home is worth $500,000, the total MIP you pay upfront is (2% of home value) $10,000. This fee is charged even if your loan amount is $50,000 or $300,000.
The FHA HECM Saver Loan is a cheaper alternative to HECM standard. The upfront mortgage insurance fee charged on HECM Saver is just 0.01%. However, there are number of restrictions associated with the saver loan. These loan carry higher interest rates and do not allow for a higher loan amount.
Both HECM standard and HECM saver require the borrower to pay 1.25% of the outstanding loan balance as an ongoing mortgage insurance premium annually.
What is the best age to get a reverse mortgage?
While you may be eligible to apply for a reverse mortgage after your reach 62 years, it may not always be appropriate to apply right away. The average age of homeowners seeking reverse mortgages has dropped from 77 years to 73 years over the past decade.
You should plan ahead if you want to not face financial difficulties during retirement. Most financial planners advise their clients to weigh other alternatives carefully before applying for a FHA reverse mortgage.
Are there other alternatives to a reverse mortgage?
Reverse mortgages are ideally suited for seniors with a substantial equity in their homes and do not intended to pass on their current home to their heirs. While there are several unique and favorable features associated with reverse mortgages, one should also consider alternatives such as selling the home and putting the proceeds into safe investments, or moving to a cheaper residence while renting out the larger home.
How is the loan amount determined?
The exact loan amount that you may be eligible to receive will depend on the age of the youngest borrower, the prevailing interest rate, the appraised value of the property and the initial reverse mortgage insurance premium amount.
Have more questions about how reverse mortgages? Here are just a few more resources we have here for you:
How much can I borrow with a reverse mortgage?
FHA reverse mortgage eligibility requirements.