Research and Understand What Reverse Mortgages Entail
Before starting the process, it’s crucial to understand what a reverse mortgaga is. In essence, it is a loan available to homeowners who are 62 years or older, allowing them to convert part of their home’s equity into cash. Unlike a conventional mortgage, the borrower isn’t required to make regular monthly payments to repay the loan. Instead, the loan is repaid when the borrower no longer occupies the home as their primary residence, generally through selling the home.
Despite the apparent advantages, reverse mortgages also come with potential risks and downsides, such as high upfront costs, decreasing the estate’s value left to heirs, and the possibility of losing the home if certain conditions aren’t met.
Evaluate Your Eligibility
Once you’ve understood the concept of a reverse mortgage, it’s essential to evaluate whether you’re eligible. Generally, to qualify for a reverse mortgage, you must:
- Be at least 62 years old
- Own your home outright or have a low mortgage balance that can be paid off at closing with proceeds from the reverse mortgage
- Live in the home as your primary residence
- Not be delinquent on any federal debt
- Have the financial resources to continue maintaining your home and paying ongoing property charges including taxes and insurance
Counseling Session
Prospective borrowers are required to undergo a counseling session with a government-approved agency. This step, mandated by the Federal Housing Administration (FHA), ensures that the homeowner fully comprehends the implications of a reverse mortgage, its costs, and its alternatives.
Choosing a Reverse Mortgage
There are three types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), proprietary reverse mortgages, and single-purpose reverse mortgages. Each type serves different needs and comes with distinct rules and costs. HECMs are federally insured and backed by the U.S. Department of Housing and Urban Development (HUD). In contrast, proprietary reverse mortgages are private loans, and single-purpose reverse mortgages are offered by some state and local government agencies and non-profit organizations.
Application
Once you’ve decided on the type of reverse mortgage, the next step is to apply. The process typically involves providing information about yourself and your home. You’ll need to present some documents, such as proof of age, evidence of homeownership, and information on any existing mortgage loans on your property.
Home Appraisal
After applying, an appraisal will be done on your home to determine its market value. This value, along with your age and current interest rates, will be used to calculate the amount of money you can borrow.
Underwriting
Once the appraisal is complete, your application will be processed and underwritten. During this stage, the lender will verify your information, review the appraisal, and check if you meet all the necessary requirements.
Loan Closing
If your application is approved, you’ll move forward to the closing process. The loan closing involves signing the final documents and paying any closing costs or fees.
Disbursement of Funds
Once the loan is closed, you’ll have three business days to cancel the loan if you change your mind, a period known as the “right of rescission.” After this period, the funds from the reverse mortgage can be disbursed.
Ongoing Responsibilities
Securing a reverse mortgage also comes with ongoing responsibilities. These include living in the home as your primary residence, keeping the home in good condition, and continuing to pay property taxes and homeowner’s insurance. Failing to meet these requirements can lead to the loan becoming due and payable.
In conclusion, while a reverse mortgage can provide much-needed financial relief, it is a complex financial product with significant implications. By understanding these necessary steps, potential borrowers can approach the process with confidence and make informed decisions. It’s also recommended to seek advice from a trusted financial advisor to determine if a reverse mortgage is the right option for your financial situation.
By Catherine Tims | August 6, 2023