Reverse mortgages address the needs of homeowners who are 62 years of age or older. This type of loan gives one the chance to convert part of the home equity into tax-free income. This is possible without selling the house, either by giving up the title or by taking a new monthly mortgage. The name of this loan product comes from the reversed payments: the homeowner receives monthly payments from the lender, instead of vice versa. Three major types of reverse mortgages exist.
- Home Equity Conversion Mortgages have the support of the U.S. Department of Housing and Urban Development (HUD). These are federally-insured reverse mortgages.
- Single-purpose reverse mortgages are available through non-profit organizations, local and state government agencies.
- Proprietary reverse mortgages are private loans supported by the same companies that issued them.
Reverse Mortgage Qualification Requirements
For a HUD reverse mortgage, the qualification requirements are as follows:
– The borrower must be 62 or older;
– The borrower must own a home;
– The home is owned outright;
– There is a low mortgage balance which can be easily paid off upon closing.
– The house must be the borrower’s residence.
– Consumer information from a HUD-approved counselor is a must prior to obtaining the loan.
Consumers must be aware of the fact that only certain types of homes meet the eligibility criteria for reverse mortgages. Thus, the house should be a single-family home or have two to four owned and occupied units. Condominium units, townhouses, some manufactured homes and detached homes may qualify. There is a FHA-approval requirement for condominiums. The Spot Loan program may also allow individual units to qualify.
How Much Does a Reverse Mortgage Cost?
Reverse mortgage include pretty much the same costs as any other regular mortgage or refinance loan. Lenders charge an up-front mortgage insurance premium, an appraisal fee, an origination fee and standard closing costs at the end.
The origination fee is justified by the lender in the form of operating expense like office overhead, marketing expenses and the like. Under the Home Equity Conversion Mortgage program, the borrower pays an origination fee that is either equal or higher than $2,000 or 2% of the claim amount. 90% of U.S. reverse mortgages are financed with the Home Equity Conversion Mortgage program.
The Mortgage Insurance Premium represents 2% of the total home value or maximum claim amount (whichever is the less of the two). The premium is assessed under the HECM program, and after the initial 2%, the annual premium is 0.5% of the loan balance.
The Appraisal Fee ranges between $300 and $400. The current market value of the home is assigned by the appraiser. It is the appraiser’s responsibility to check whether there are significant structural defects (i.e. roof damage, bad foundation, termite damage). The value of the house is established based on such aspects.
Closing Costs include a pretty long list of fees that reverse mortgage borrowers have to pay.
- The credit reporting fee is charged for verifying any federal tax liens or judgments that may have been handed down against the borrower. The amount of the fee is usually $20.
- The flood certification fee is charged for determining whether or not the property is located on what is considered a federally-designated flood plane. This fee is under $20.
- Lenders charge an escrow, closing or settlement fee to cover for various types of closing services such as title search, depending on the area where the property is located. The cost could vary between $150 and $450.
- The document preparation fee applies to the preparation of the final documents by the lender. The papers involved are the mortgage note and other recorded items. The cost ranges between $75 and $150.
- The lender charges a recording fee to record the mortgage lien with the homeowner’s county recorder’s office. The cost for this could vary between $50 and $100.
- The courier fee is charged for the mailing of the documents from the lender to the title company. This usually costs less than $50.
- Title insurance adds up to the list of expenses. It offers protection to the lender against any loss resulting from disputes of property ownership. The size of the loan influences the amount you pay. However, the larger the amount of the reverse mortgage, the more expensive the insurance.
- The pest-inspection fee is charged for a home inspection against wood-destroying organisms. The fee is less than $100.
- The property survey adds up to the list of expenses. By means of this survey the lender determines the ‘real’ boundaries of the property. It is a way of checking that neighboring properties have not encroached on the borrower’s property. The cost of a survey is less than $250.
Getting the Money
The sum you can get from a reverse mortgage varies greatly depending on the type of program selected by the borrower. The amount differs from one program to another.
- The average borrower could get $30,000 from one program and obtain a lot less with another. There is not a generally valid solution for all home owners. People with the most expensive homes get the most cash with HECM.
- Several factors influence the amount of cash obtained from each program:
– The age of the owners;
– The value of the home;
– The current interest rates.
Based on these factors, those who get more cash are older borrowers, living in highly valued homes and at a time of low interest rates. The least cash scenario applies to younger homeowners, with lower home value and at a time of higher interest rates.
Borrowers may select from three different ways to get the payment: a credit line, monthly payments, a one-time lump or a combination of these three.
Bank Home Equity Loans and Reverse Mortgages
In order to qualify for a bank home equity loan, the homeowner must have low debt and a good income, whereas for a reverse mortgage, the homeowner receives a payment regardless of income. The income vs. debt ratio is not relevant for the reverse mortgage. For this case, the amount of money the borrower qualifies for depends on the value of the house, the interest rates and the homeowner’s age.