If you’re a retired homeowner with little-to-no savings but a lot of home equity you’ve built up over the years, you may be looking into a reverse mortgage to free up some of your savings to pay for your daily expenses.
For many seniors, their home is their biggest investment and where most of their lifetime income has gone to. While you can turn to selling your property to downsize, you may not want to move out of your home. This is where reverse mortgages come into play.
In simple terms, reverse mortgages allow seniors with home equity to use that equity for their day-to-day living. Seniors can use their funds for anything they need – typically this financing is earmarked to help cash-strapped people fund their retirement. Unlike home equity loans or home equity lines of credit, you won’t have to make a single payment on your principal loan or the interest and fees incurred until you move out, sell your property, or pass away, making reverse mortgages a unique tool for homeowners.
But qualifying for and securing a reverse mortgage isn’t easy work. This type of financing involves a rigorous application process. You’ll need to do your due diligence to secure the best terms for this costly loan, too.
Reverse Mortgage Eligibility Requirements
Before proceeding with a reverse mortgage application, make sure you meet the criteria set out by the U.S. Department of Housing and Urban Development. They include these key requirements:
Age and Home Equity
To start, you must be at least 62 years of age and you must use the property as your primary residence, which means you live there the for the majority of the year.
You must also own the property outright or have a low mortgage balance. Ideally, you have a sizeable amount of equity – at least 50 percent. Your equity should be enough to cover the costs incurred from setting up your reverse mortgage, including accumulating interest, loan origination fees, closing costs, and ongoing mortgage insurance premiums.
If you don’t have enough home equity, this loan may not be worth the expenses and time involved.
If you own a house, condominium, townhouse, or a manufactured home built on or after June 1976, your property should meet the criteria for a reverse mortgage.
Your property must also meet all Federal Housing Administration property standards and flood requirements.
You’re in the clear if your property is a:
- Single-family home or 2-4 unit home with one unit occupied by the borrower
- HUD-approved condominium project
- Individual Condominium Units that meet FHA Single Unit Approved requirements
- Manufactured home that meets FHA requirements
Under FHA rules, cooperative housing owners can’t secure reverse mortgages. This is because they don’t technically own the property they live in.
No Federal Debts Outstanding
If you’re delinquent on your income taxes or student loan payments, pay off these debts before applying for a reverse mortgage. While consumer debt like credit cards or lines of credit are okay to have, you shouldn’t owe any federal debt. You can use the money from your reverse mortgage to clear these debts, but it may be easier to secure better loan terms with these debts cleared.
When you applied for a home loan, lenders preferred you had cash in savings to safeguard against emergencies like job loss, medical bills, or unexpected home repairs. This applies to reverse mortgages, too: The criteria says you should have liquid cash on hand to help take care of your property and expenses like property taxes, homeowner’s insurance, and utility bills. You can dedicate a portion of your reverse mortgage funds for this, but showing your lender you’ve got your finances under control during the application process will give you the upper hand.
During the application process, your lender will conduct rigorous credit checks, looking back at your credit history and how you’ve managed debts over the past few years. Get a copy of your credit report before applying to make sure there aren’t any errors and stay on top of monthly bills in the year leading up to your application.
You’ll also need to stay on top of property taxes, and homeowner’s and flood insurance premiums. Your lender will verify that you aren’t delinquent with any of these accounts.
Your property is acting as collateral on your loan. Essentially, when you sell, move out, or pass away, you – or your heirs – will sell the home and use the funds to pay off the entirety of your loan, from the principal balance to the interest, fees, and charges tied to the mortgage.
Because of this, your lender will insist that you keep your asset in great condition. During the application process, your lender will set up appraisals and home inspections to make sure your property is priced at the right value and is in sellable condition. If your home is not up to par, they’ll insist on specific repairs or renovations that must be made before you can get approved. Be one step ahead and take care of your home, from deep cleaning to staying on top of repairs.
Before you can apply for a reverse mortgage, a final hoop to jump through is completing a single 90-minute session of HUD-approved financial counseling.
It comes with a one-time $125 fee. In the course, candidates learn about their eligibility, the long-term financial implications of taking out a reverse mortgage (on them and their families), and the other financing options available to them. Counselors also teach you about government benefits available to you, such as Supplemental Security Income.
Setting up your reverse mortgage
Reverse mortgages come in various shapes and sizes, from how to receive your funding to choosing between a fixed or variable interest rate, as examples.
There are three types of reverse mortgages you can choose from:
- Conventional reverse mortgages. These are the most common reverse mortgages – they’re Federal Housing Administration-insured and follow conforming loan limits set each year by the federal government.
- Single-purpose reverse mortgages. This option is offered by state and local governments and non-profits, aimed primarily at helping homeowners with a low income. These are the least expensive reverse mortgage option, but they must be used for specific purposes set out by the lender, such as for home repairs or to pay for property taxes. You can check on whether you qualify for one of these loans through your local Area Agency on Aging.
- Proprietary reverse mortgages. These aren’t FHA-insured, and they’re typically earmarked for borrowers sitting on high-value homes. With this option, homeowners with lots of equity can surpass government-mandated loan limits by applying for a private reverse mortgage. These come with the highest interest rates, though.
You can also apply for a jumbo reverse mortgage if you’re living in a high-value home. Overall, most seniors would fall into the category of conventional reverse mortgages.
You can also choose how you’ll receive the proceeds of your reverse mortgage. This decision will determine the interest rate you end up with. The most common options include:
- Lump sum. Some homeowners prefer to receive the entirety of their reverse mortgage funding in a single lump sum when the loan closes. If you choose this option, you will get a fixed interest rate.
- Equal monthly payments. If you adhere to the eligibility criteria, you can choose for your lender to give you equal monthly payments without a set term. This comes with an adjustable interest rate.
- Term payments. With this option, your lender gives you – the borrower – equal monthly payments too, but this time there’s a fixed timeframe, such as 10 years. This, too, comes with an adjustable interest rate.
- Line of credit. Some homeowners prefer to have a line of credit, making cash available to them only when needed. In this case, you’ll only pay interest on the amount actually borrowed from this account.
- Equal monthly payments plus a line of credit. For more flexibility, you can set up a reverse mortgage with equal monthly payments – in perpetuity or with a set term – and include a line of credit in case of emergencies.
5 Steps to Help you Secure the Best Deal on your Reverse Mortgage
If you meet the qualification criteria and aren’t deterred by the rigorous process involved with securing a reverse mortgage, here’s a step-by-step look at how to secure the best deal on your loan.
It’s worth your while to follow these steps – ultimately, scoring a great deal on your loan will help you save your hard-earned equity instead of spending it away on interest and other costs.
Understand how reverse mortgages work, and why you’re applying for one.
Familiarize yourself with the types of reverse mortgages on offer and choose the one that best suits your situation. Do some research to get to know the costs involved, how a reverse mortgage differs from a traditional mortgage, and how this route compares to other options available to you.
You should also look at your monthly budget to get a sense of how much financing you need. Are you considering taking out a reverse mortgage to pay for medical expenses, home repairs, or daily costs? With a clear idea of how much you need and why you need it, you can press ahead with your financing journey.
Gaining this understanding at the start will also help you present your case to lenders, providing a clear vision of why you need this loan, how much you plan on borrowing, and what your exit strategy may be. This also provides some peace of mind to you and your loved ones.
Get your personal finances in great shape.
Typically, there aren’t income requirements to get a reverse mortgage. This kind of financing is designed to help seniors short on income and retirement savings, after all.
But lenders will evaluate your finances with a fine-tooth comb, poring over your savings, home equity, existing debts, monthly expenses, and various revenue streams.
Their job in underwriting your loan is to make sure you can both pay back the loan and keep up with maintaining the property, from property taxes to homeowner’s insurance, maintenance, and repairs.
Your lender may insist that you set aside money – either from your own savings or from the proceeds of your reverse mortgage – for these costs. They need your home to be in great condition and ready to sell when it’s time for you to repay your loan.
You’ll also undergo a thorough credit check. You should request a copy of your credit report beforehand to see how well you’re doing in the eyes of your various creditors. Don’t make any late payments and stay on top of all your bills ahead of your application.
Doing your due diligence and preparing to show lenders you’re a responsible borrower will make a big difference in helping you to secure the best terms for your loan.
Meet with a housing counselor.
One of the requirements for getting approved for a reverse mortgage is completing a 90-minute financial counseling session with a HUD-approved counselor. You can check the HUD’s website for a list of counselors or call the agency at 1-800-569-4287.
It’s typically a $125 fee, however, it may be more. This fee can be paid for from the loan you get, too.
Take notes as the counselor walks you through the ins and outs of a reverse mortgage, including the short- and long-term financial implications of dipping into your home equity.
Ask them to explain the costs of the different types of reverse mortgages and the various routes you can take to receive your financing and repay your loan. They can even show you the total annual loan cost (TALC), including all the itemized costs.
This session may be an eye-opener: About 41 percent of people who receive this counseling move on with their reverse mortgage application, according to government estimates.
The Consumer Financial Protection Bureau suggests seniors ask these questions when they’re meeting with a counselor:
- What are the upfront and ongoing costs and fees in taking out a reverse mortgage loan?
- How will a reverse mortgage loan affect my spouse, or other people living with me?
- What happens if I want to sell my home or if I must move to a nursing home once I have a reverse mortgage loan?
- What happens to my home when I pass away?
- How do I receive the money from my loan proceeds? Would it be better to take out the money as a line of credit, in monthly installments, or in a lump sum?
- If I already have a mortgage on my house, how is that affected by a reverse mortgage?
- What other options should I consider other than a reverse mortgage loan?
Don’t be afraid to shop around!
If you’re sure a reverse mortgage is your best bet after meeting with a counselor, move forward with comparison shopping to find the best deal.
- Compare your options. To start, look at your various options from lenders that provide reverse mortgages, zeroing in on their terms, fees, and interest rates. While some charges, such as the mortgage insurance premium, are the same regardless of the lender, costs such as loan origination fees and servicing fees will differ.
- Confirm all upfront costs and study the fine print. With the help of your lender, counselor, and trusted family members, get a firm grasp of the immediate and recurring costs you’ll have to pay for each option. You’ll need to decide if these expenses are worth the cost of borrowing. Look at the fine print on these reverse mortgage products, checking to make sure they include a “non-recourse” clause. Most conventional reverse mortgages have this clause – it means that you, or your estate, can’t owe more than the value of your home when the loan becomes due and the home is sold. This is another reason why mortgage insurance is worth maintaining.
- Confirm whether the offer is for a fixed or variable interest rate. As noted above, most reverse mortgages have variable rates that fluctuate depending on market conditions. Work with your lender to decide how you’d like to receive the funds from your loan, which will determine the type of interest rate you’re signing up for. Compare interest rates between lenders, but don’t let this be the biggest factor – ultimately, you’ll need to compare the full scale of variables, from interest rates and terms to closing costs and long-term recurring expenses.
Take your Time
Don’t rush through this process, and don’t let salespeople pressure you to decide to take out a reverse mortgage.
Always ask for a second opinion with a HUD-approved counselor and trusted advisors within your family before you sign any contracts or documents. In a field that’s ripe with scams targeting seniors, walk away from any deals that you feel pressured to complete.
If you go through with a reverse mortgage loan, you also have a three-day right to cancel, according to the FTC. This is known as your right of “rescission.”
You must notify your lender in writing within three business days by sending a letter by certified mail. Ask for a return receipt so you can document when your lender received your correspondence. After you cancel, your lender has 20 days to return any money you’ve paid for the financing.
Carmen Chai is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. For NewHomeSource, Carmen covers a variety of topics, including insurance, mortgages, and more.