Answers to Reverse Mortgages
Frequently Asked Questions
- What are the facts about reverse mortgages?
- What are the qualifications?
- How much can be borrowed?
- How is the money received?
- What is the interest rate?
- What is the Principal Limit Protection?
- What are the costs?
- How does the reverse mortgage affect taxes, government and public benefits?
- How is the loan repaid?
- Is counseling required?
A Reverse Mortgage is a mortgage that allows a homeowner 62 or older to use the equity in their home to receive cash while continuing to own and live in it. They are different from conventional home equity loans because there are no income or credit qualifications for the interest rate, and no monthly or immediate mortgage repayments*, and the mortgage is paid off when the home is no longer the primary residence of the borrower.
A Financial Assessment is completed using ones income and credit to determine their ability to pay property taxes and insurance and other home expenses into the future. Borrowers are responsible for paying property taxes and insurance.
The types of Reverse Mortgages are FHA insured HECM and proprietary programs.
One must be 62 or older and own a home which is their primary residence and have equity in the home to pay off any current liens or mortgages. Borrowers must meet HUD’s Financial Assessment requirements for income and credit history for documenting their ability to pay property taxes and insurance. If one is 62 or older and moving to a smaller home they may do a Reverse Mortgage for Purchase. Single family, two- to four- unit properties, townhomes, and FHA approved condos qualify. Some manufactured/mobile homes also qualify. The home needs to be in reasonably good condition, meeting HUD minimum property standards. It may be possible to do some repairs after the closing of the Reverse Mortgage though restrictions do apply.
How much can be borrowed?
The amount borrowed, or maximum principal limit, is based on the program chosen, the value of the home or FHA’s lending limit, the age of the youngest borrower, and the current interest rate. The loan fees and any current liens must be paid at the time of closing. They may be paid with, and generally are paid with, the Reverse Mortgage proceeds.
FHA’s lending limit or maximum claim amount is $1,089,300 through 2023. One can do a Reverse Mortgage with a higher valued home, but the maximum they can borrow is based on the lending limit of the program they choose.
Depending on the program chosen, the borrower can receive their cash in monthly payments, a line of credit, a lump sum, or a combination of these.
Monthly Payment: The monthly payments may be received as a tenure plan, receiving a monthly check as long as they occupy their home as their primary residence, or they may be set up that the borrower receives a certain amount each month or for a certain period of time, i.e. 10 years. This option is only available with the HECM Adjustable Rate option.
Line of Credit: With the FHA Home Equity Conversion Mortgage (HECM) adjustable rate loan, the balance in the credit line grows based on the current interest plus 0.5%. Often confused as an interest rate, it is actually a growth rate. Growth rate means more funds are available for use at a future date. If one has not accessed the money in the line of credit it is not their money so interest is not earned.
What is the interest rate?
The interest rate depends on the Reverse Mortgage program one chooses. The rate is made up of a margin and an index. The initial rate is determined at the time of closing. The FHA interest rate adjusts monthly or annually, or can be fixed. The initial interest rate is based on the Constant Maturity Rate (CMT) or the 1-year U.S. Treasury Index and the expected interest rate, used for projections, is based on the CMT or the 10-year U.S. Treasury.
The adjustable rate does not affect the amount of money received, but rather affects the amount that is required to be paid back when the loan is repaid. Interest is only charged on monies that are withdrawn. With the HECM Adjustable Rate program any money left in the line of credit has a growth rate.
July 18, 2005 brought the long awaited approval of the “Rate Lock-in” or Principal Limit Protection for HECM Reverse Mortgages. This HUD policy reduces some of the uncertainty of the loan amount between the time of application and the closing date.
To understand the value of this, you need to know how the loan amount is determined: The loan amount, or Principal Limit, of a Reverse Mortgage is determined by the age of the youngest borrower (or Eligible Non-borrowing Spouse), the home value or FHA lending limit, and the Expected Interest Rate. The Expected Interest Rate is based on the CMT/10-year U.S. Treasury and changes weekly for calculation purposes. Prior to the Principal Limit Protection, the Principal Limit could not be determined until the week of closing because the Expected Interest Rate changes weekly.
Because of The Principal Limit Protection, when the borrower closes, the Principal Limit can be calculated using the Expected Interest Rate at the time of application or at closing, whichever is lower. Sometimes the rate can change enough between the time of application until closing making a several thousand dollar difference in funds available to the borrower(s)
The catch is the loan needs to be closed within 120 days from the date the FHA Case Number is assigned. This number is needed to order the FHA Appraisal needed to do a reverse mortgage. If the loan is closed on day 121, the Expected Rate at the time of closing would be used. It is important borrowers work with a lender, such as Reverse Mortgages SIDAC, that have the knowledge, experience, and reputation of processing reverse mortgage loans in 30 to 45 days.
What are the costs?
As with a regular mortgage, the costs associated with the Reverse Mortgage include the appraisal, origination fee, title insurance, escrow, and recording fees. The FHA plan includes a 2% initial mortgage insurance premium, determined by the funds being drawn in the first twelve months. FHA insurance guarantees the funds are available to the borrower if something happens to the lender. This insurance protects the borrower from re-paying more than the value of the home, covering the difference to the lender. The costs associated with a reverse mortgage can be financed so there are no up front out of pocket fees other than the cost of the appraisal and possible inspections and possibly the counseling.
Click here to read the details of the reverse mortgage costs in Minnesota.
The money received from a Reverse Mortgage is considered a loan, not income so the generally not considered taxable income and Social Security and Medicare are not affected. It is possible to receive public benefits such as Medical Assistance/Medicaid, food stamps, SSI and obtain a Reverse Mortgage. So these benefits are not affected, the cash received from the Reverse Mortgage must be spent in the month it is received. (Legal services should be consulted for a particular situation.)
Payment of the Reverse Mortgage is not due until the borrower permanently leaves the home or upon other maturity triggers. Although the loan could be called due if one does not abide by the terms of the loan such as not paying property taxes, hazard insurance, and maintaining the home.
As a non-recourse loan, the repayment amount cannot exceed the value of the home with no personal liability for the borrower or their estate. The loan is generally paid through the sale of the home. If heirs wish to maintain ownership, the loan can be repaid with other liquid assets or by obtaining a conventional mortgage. In the case of joint borrowers, when one of them dies, the mortgage stays in place as long as the other borrower has the home as their primary residence and abides by the terms of the loan, i.e. paying property taxes, hazard insurance and maintaining the property.
The amount to be repaid includes the closing costs, cash advanced to the borrower over the length of the loan, the accrued interest, and accrued FHA Mortgage Insurance Premium (MIP) on the HECM. Any remaining equity is retained by the borrower or their heirs.
While not required, payments can be made during the time of the loan. The amount paid reduces the balance of the loan and increases the amount available in the line of credit (on adjustable rate’s only). There are no prepayment penalties when the loan is repaid.
Is Counseling Required?
Borrowers are required to go through third-party counseling by a trained HUD approved housing counselor. The counseling may be done done over the phone, in the counselor’s office or your home. Counselors are allowed to charge per session, generally around $125. We can assist you in locating a counselor by providing a list of the MN HUD approved counselors.
*Borrowers responsible for property taxes, hazard insurance, maintaining the the home and abiding by the terms of the loan or may face foreclosure.
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