Basic Features Reverse Mortgages
All reverse mortgages—whether they are the FHA Home Equity Conversion Mortgage or a conventional product—share a set of common characteristics, which include the following:
- The youngest borrower must be at least 62 years old and own their home.
- The borrower ALWAYS retains title (ownership) to the home. The lender does not, at any point, owns the home, even after the borrower (or last surviving spouse) permanently vacates the property.
- The borrower must still pay property taxes and insurance, and keep the home well maintained. If the borrower is unable to pay their property taxes and insurance, then a special set-aside from the reverse mortgage can be created.
- Repayment of the loan occurs when the borrower (or last surviving spouse) permanently vacates the home. The borrower or the borrower’s heirs then must facilitate the pay back of the loan by refinancing or selling the home. After the loan is repaid, all leftover proceeds from the sale of the home go to the borrower or their estate.
- The amount of funds the borrower is eligible to receive depends on their age (or age of the youngest borrower in the case of couples), the value of the home, the interest rate and the upfront costs. With the HECM product, the county lending limit is a factor. With all products, the older the borrowers are, the more proceeds they are eligible to receive.
- Loan fees can be financed, or paid out of the available loan proceeds. This means borrowers incur very little out-of-pocket expense to get a reverse mortgage. In most cases, borrowers only have to pay for the appraisal, which costs roughly $375 depending on the appraiser’s fee schedule.
- The loan balance (amount owed) grows each time the borrowers access funds from their line of credit or receive a monthly payment. In addition, the lender is charging interest on the outstanding loan balance as well as a monthly servicing fee.
- Repayment of the loan is not required until the borrower (or the last surviving spouse) permanently leave the home as a primary residence. For the HECM program, the borrower can live up to 12 consecutive months outside the home, but this may vary for other products.
- The total amount owed can never exceed the appraised value of the home. If the amount owed exceeds the home's appraised value, then the lender or the federal government (in the case of the FHA HECM product) will absorb that loss.
January 4, 2009
