Senior citizens often find themselves short on cash following retirement. The cost of living, medical care, and other expenses continue to rise no matter your age. Or maybe you’d like to have some fun, take a nice vacation, or make improvements to your home. One possible way to supplement your income and get the money you need is to apply for a reverse mortgage.
What is a Reverse Mortgage?
A reverse mortgage is a loan that allows you to convert equity in your home into cash. The value of your home determines the amount of the mortgage. The loan is available to homeowners who are 62-years old or older. The purpose of a reverse mortgage is to help senior citizens with little income pay for expenses such as medical care, food, and utilities. There are no restrictions on how the money is used, so you can use the funds however you like.
Understanding How the Loan Works
This type of loan is the reverse of a traditional mortgage loan. Instead of making payments to the lender, the lender pays you monthly or in one lump sum. As the borrower, you aren’t required to repay the loan unless you move out of the home or sell it. Your property taxes and homeowners insurance must remain current for the duration of the loan.
Conditions for Loan Termination
The mortgage is officially terminated once the borrower dies. If you are the borrower, then your adult children or other heirs have to repay the loan. Repaying the loan is the only option if your heirs want to keep the property. If no one wants the property, then your heirs can sell it or give it to the lender.
You can also get out of the agreement without dying. Your options are to sell your home or get a traditional mortgage and repay the mortgage with the funds. Another option is to use your savings to repay the loan, but this is only recommended if you have a substantial amount of money saved.
Legally, you have three business days to cancel the loan after signing the paperwork. The lender is required to explain this process during loan closing. If the lender fails to provide the information, make sure to ask for instructions on canceling the loan.
What If I Want to Sell My Home?
You can sell your home, but you need to contact the lender before doing anything. Find out exactly how much you owe on the loan. This amount should include what you’ve received, the interest, and any additional fees. Get the total amount due in writing before putting your house on the market. When you’re ready to sell, make sure you get enough to repay the loan in full.
Who Qualifies for a Reverse Mortgage?
Anyone who is at least 62-years old is possibly eligible for the loan. In addition to meeting the age requirement, your name must also appear on the home’s title. It’s also best if the home is paid in full. But if there is a balance on the mortgage, it must be low enough to repay with money from the reverse mortgage.
Another requirement is that you must live in the home. If it is not your primary residence, then you cannot use it for a reverse mortgage. There is also a required counseling session with an agency approved by the US Department of Housing and Urban Development (HUD). During counseling, you will discuss the specifics of the reverse mortgage and examine the pros and cons.
In addition to the personal qualifications, there are requirements for your home as well. A single family home or a 4-unit multiple-family home qualifies for a reverse mortgage. If it’s a multiple-family home, then you must occupy at least of the units. A manufactured home is eligible if it meets the requirements set by the Federal Housing Administration (FHA). You can visit the FHA website for extensive information on their requirements for a manufactured home. A condominium is eligible as well, as long as it is approved by HUD.
How Much Equity is Necessary?
Most reverse mortgages require at lest 40 percent equity, but it varies based on the lender. To determine your equity, subtract what you owe on the mortgage from the value of your home. Divide the answer by the value of your home to get the equity percentage. For example, the lender might require 20 percent equity. If the home is worth $250,000 and you owe $200,000, that means your equity amount is $50,000. Since $50,000 is 20 percent of $250,000, that means you have 20 percent equity.
It’s easier to get approval if the home is paid in full. But even if there is a mortgage, the lender might approve the reverse mortgage as long as you meet the equity requirement.
Seek Professional Assistance
The qualifications and requirements for a reverse mortgage can feel overwhelming. Consider speaking with a HUD-approved reverse mortgage counselor for more guidance. The counselor will be able to speak with you in detail about the loan process.